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Analysts skeptical on bull case for met coal following Australia cyclone

Analysts with Morgan Stanley are warning investors feeling bullish on metallurgical coal they may want to take a step back.

In an April 4 note, analysts Tom Price and Brendan Fitzpatrick said that even though Cyclone Debbie "just made a mess of Queensland, Australia," there are reasons to be a little unsure the weather event striking a region that sources half of the global met coal trade will lead to major gains in coal stocks. Morgan Stanley notes the range of estimates placing 13 million to 19 million tonnes of metallurgical coal — or about 4% to 6% of global supply — lost to trade is enough to move prices upward.

However, the analysts wrote they are "flat-to-bearish" on a met coal price outlook. They say a bull case on metallurgical coal markets depends on nothing else changing.

"But," the authors write. "There's lots of other mostly-supply-side things changing at the moment."

The note claims the met coal industry usually prepares for wet seasons and provides a supply buffer down the supply chain and port inventories to prepare ahead of time. Queensland's wet season is also over and weather conditions are expected to improve. They wrote that several other factors will limit how much supply will be constrained.

"[The] media continues to compare [Tropcial Cyclone] Debbie with flood-related prices spikes of 2008 & 2010/11; we're big fans of comparing things with history, but these are not perfect historical analogies," the analysts wrote.

According to Price and Fitzpatrick, those earlier spikes occurred in 2008 before a spot market existed and in 2010 through 2011 when a labor strike earlier in the year affected prices. Therefore, they said, spot prices are unlikely to hit those previous levels during this cyclone event because "based on current supply-side drivers, in our view, now is not like then."

FBR & Co. analyst Lucas Pipes recently released a note suggesting investors stay long on coal stocks, but be wary of price drops in the back half of 2017.