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Analyst warns to look beyond short-term spike in met coal market

Metallurgical coal prices are spiking, but FBR & Co. Analyst Lucas Pipes warned that the upswing is likely short-lived.

Pipes encouraged coal investors to stay long on met coal names in an April 7 note, but warned there is likely to be a second-half price decline. Floods brought by Cyclone Debbie have disrupted transportation in Queensland, Australia, but Pipes said the long-term price forecast should not be heavily affected by recent spot price movement.

The note said Pipe estimates the flooding will disrupt about 29% of the seaborne met coal supply, a total of 10 million tonnes. He said while steelmakers will scramble to fill that void, there is no apparent supply plug due to the size of the disruption.

"We expect prices to remain highly elevated in April and start to recede over May," Pipes said. "We believe some relief will emerge from reduced Chinese import demand and increased North American and Russian supply, among others."

Pipes wrote that he expects prices to stay "extremely elevated" in the near-term with rumors of a $285/tonne to $300/tonne second-quarter benchmark. However, he also added high prices will likely lead to lower prices in the medium and long-term.

"High prices mean more supply, which tends to be sticky once prices start to correct," Pipes wrote. "We model a [third-quarter] benchmark of $160/tonne and believe there is now greater downside risk to this forecast."

Australia, to a limited degree, could make up the lost shipments, Pipes noted.

Among U.S. coal producers, Pipes has recently praised Contura Energy Inc. and Arch Coal Inc. He also recently initiated coverage of Peabody Energy Corp., which just completed a bankruptcy reorganization, with an "outperform" rating.