Goldman Sachs Upgraded Coal Price Forecasts

Coal Price Forecast Upgrade

We have raised our coal price forecasts principally in response to improving supply/demand fundamentals in Asia/Pacific. We now believe that the balance of risk for 2010/11 fixed price contracts is for a price increase rather than a decrease. We prefer metallurgical coal over thermal coal.
Metallurgical Coal
• We have raised our 2010/11 Australia/Japan benchmark forecast for hard coking coal to US$140/t (previously US$120/t) and have maintained prices at this level in 2011/12 (previously US$110/t).
• Strong demand from China and India, together with an anticipated recovery in demand from key importers such as Europe and Japan will put pressure on Australian supply chains, drawing more higher cost north American and possibly Russian coal into the system.
• PCI price forecast raised to $100/t, largely due to Chinese demand.
Thermal Coal
• Fundamentals slightly less robust than for metallurgical but export constraints in Australia (and possibly Indonesia) could result in a much tighter market by late 2009, paving the way for higher contract prices.
• We have raised our benchmark 2010/11 price forecast to $80/t.
Where are the Risks?
• Weaker than expected pick up in steel production outside China (notably Europe and Japan) leading to delayed/muted re-stocking.
• Chinese contractual performance risk: foreign coal could price itself out of the market leading to defaults on booked tonnage.