Glencore settles a long-term coal contract at US$395: A glance at ASX-listed coal stocks

Mining and commodity trading giant Glencore and Japanese power utility company Tohoku Electric entered into one of the most expensive long-term contracts for thermal coal, locked in at US$395 a tonne from October 2022.

Glencore is one of the world's largest thermal coal producers, producing 67.7m tonnes of thermal coal in 2021, according to the company's website.

S&P Global notes that the volume transacted in the contract remains uncertain.

This tops another expensive deal that Glencore secured in July with Japan's Nippon Steel Corp at US$375 a tonne. The same deal a year ago was roughly a third of what's being priced today.

"Australian coal prices have remained elevated post the war as buyers, especially from Europe and Japan, have been trying to secure supply of the high-CV material as an alternative to Russian thermal coal," said S&P Global.

"An Indonesia-based trader said the price reflects how tight the market for high-CV thermal coal is, with alternatives also priced higher."

Coal price forecasts

The Australian Government's commodity forecaster, the Office of the Chief Economist (OCE) expects thermal coal prices to average US$333 in 2022 and ease to around US$125 in 2024, according to its September quarterly report.

Still, the OCE sees risks skewed towards the upside among covid-related shortages, adverse weather events, the fallout from the Russia-Ukraine war and the lack of new investment.

"Many of these factors are likely to be long-term and structural, resulting in high and volatile prices for thermal coal over the foreseeable future," the report said.

A glance at coal stocks

Coal stocks like Whitehaven Coal (ASX: WHC) and New Hope (ASX: NHC) are in a rather awkward place. In summary:

• They've run up pretty hard, up around 200% year-to-date

• Even after the run up, they're still trading at 2-5 times FY22 profits

• There's still a lag between current coal prices and the average coal price the miners are selling at (e.g. Whitehaven and New Hope average realised price in FY22 was A$325 and A$282 a tonne respectively)

• Both companies are swimming in cash and considering capital opportunities such as special dividends, share buybacks and M&A opportunities

Earlier this week, Citi downgraded Whitehaven to a Sell from Neutral based purely on valuation.

Even after downgrading the stock, the broker raised its price target from $7.40 to $8.30 and acknowledged the risk of 'higher-for-longer' coal prices.

Whitehaven share price chart