What: Wesfarmers Ltd (ASX: WES) has announced to the market the results of its quarterly coal price negotiations.
The update on its coal division shows that Wesfarmers is set to receive a weighted average US$ Free-on-Board (FOB) price for metallurgical coal in the September quarter that is approximately 15% below the prices achieved in the June quarter.
So What: Wesfarmers noted that the price negotiations were in line with recent market settlements and had been impacted by the downturn in the Chinese steel industry.
Importantly, the total earnings from Wesfarmers' coal division aren't just dependent on the coal price but also on the volume produced. In this respect, Wesfarmers is better placed with the group also reporting that total coal production was 4.4% higher than the previous quarter. Higher volumes could help to offset lower prices, but it certainly wouldn't appear to be a saviour for the division.
Despite the quarterly update being far from great, the market still sent the share price up 2.54% on Wednesday, which was better than the performance of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) which gained 1.05%. The rally suggests the market may had been expecting an even worse result.
Now What: At Wesfarmers' interim results for 2015 the coal division's contribution to group earnings was only $35 million; representing just 1.6% of total earnings. In the near term this contribution could decline even further which does make the division less significant when assessing the current earnings power of the conglomerate.
The Coles supermarket business is of course the dominant driver of the Wesfarmers business now with the division contributing $895 million, or 43% of group earnings. It's this division which the market is likely to remain focussed on. Savvy investors however will keep an eye on the coal division as it is the long-term, through the cycle earnings which count and the market may just offer up the opportunity to purchase Wesfarmers on the cheap if it fails to accurately ascribe fair value to the coal assets.
