The Whitehaven Coal Ltd (ASX: WHC) share price has been on fire this year.
Despite losing more than 10% last week, the S&P/ASX 200 Index (ASX: XJO) coal stock is up an astounding 241% in 2022 on the back of soaring coal prices.
This year has also seen Whitehaven resume its dividend payments for the first time in two years. At the current share price, Whitehaven Coal trades on a trailing dividend yield of 5.1%.
But both the share price and its future dividend payouts could come under pressure if coal prices fall as low and as rapidly as was laid out in the federal budget estimates last week.
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Why did coal prices rocket this year?
Energy prices were already trending higher heading into 2022 as the world reopened from the lengthy pandemic shutdowns.
Then Russia's invasion of Ukraine sent energy prices soaring as the West moved to ban Russian oil, gas and coal exports, among other sanctions.
Thermal coal (primarily used to generate electricity) saw prices rocket even faster than metallurgical coal (primarily used for steel making).
Whitehaven mines both varieties, earning more than half its revenue from thermal coal.
In early March, Newcastle coal (thermal) was trading for US$440 per tonne, a record high. At the time, the Whitehaven Coal share price was 'only' up 50% for the calendar year.
As of Friday's close, thermal coal was trading for US$385 per tonne.
But if last week's federal budget forecast is correct, coal prices are likely to head in the other direction heading into 2023.
Why the Whitehaven Coal share price could outperform forecast
The federal budget forecasts that coking coal prices will slide to $US130 per tonne (Free on Board (FOB) Australia) by Q1 2023. Meanwhile, thermal coal prices are forecast to fall to $US60 per tonne (FOB Australia) by the end of Q1 2023.
That kind of retrace would clearly throw up some headwinds for the Whitehaven Coal share price.
But the coal mining giant might perform far better than the budget's coal price forecasts suggest.
Last week Commonwealth Bank of Australia (ASX: CBA) published its Economic Insights report, scrutinising the budget forecasts.
When it came to the outlook for coal prices, CBA's analysts were far more bullish.
On metallurgical, or coking coal, the bank said:
The Budget's coking coal price view is markedly lower than our view from 2022/23 to 2025/26… We think the disruption to Russian coking coal exports (~10% of the seaborne market) will take years to replace fully, helping keep a premium entrenched in coking coal prices over the Budget's outlook period.
CBA also believes thermal coal prices will hold up better and longer than the budget has estimated. According to the report:
Like coking coal, we see the disruption to Russian thermal coal exports (~15% of the seaborne market) to be more long-lasting than the Budget over the outlook period. Replacing Russian thermal coal exports in the seaborne market will be challenging given the underinvestment in the sector over the last few years.
If CBA's analysts have got this right, the Whitehaven Coal share price should fare considerably better than under the budget's outlook.
