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Coal continues to burn strong

9 July 2024 08:00

Bearish takes on the world’s dirtiest fuel continue to rage, yet the coal price has remained steady over the past 12 months. Despite coal’s negative reputation among some investors, it remains the world’s largest energy source for electricity generation, steelmaking, and cement production.

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Figure 1: Coal Prices from 2021-2025. Source: World Bank

Bucking the trends

It’s true that overall coal consumption is forecast to peak this decade. China, which accounts for over half the world’s demand, is facing economic troubles. In May G7 members agreed to start a phase out of coal plants by 2035.

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Figure 2: Changes in coal consumption from 2021-2025, with data for 2024 and 2025 based on the IEA’s forecast. Source: International Energy Agency, World Bank.

Countries remain well stashed, with European and China storage levels remaining mostly full. Supply is abundant, having risen 10% over the past two years with China’s output hitting records as they look to cut down on imports. Even the global economy is suppressed by high interest rates and China’s lack of growth. That doesn’t account for the push towards renewable and clean energy sources, away from coal.

Despite all these macro factors suggesting there should be never ending downward pressure, the current coal price sits at $136 USD/t, above where it began the year and higher than it sat at 12 months ago. While developed economies are looking to ditch the dirty stuff, developing ones are using more to keep the lights on.

Demand holds strong

The 2022 energy crisis highlighted coal’s strengths as a cheap and reliable source of power. India is leading the way in increased demand for coal, with large infrastructure projects continuing the momentum of their economic revival.

Morgan Stanley analysts are expecting demand to outstrip supply by an estimated 14 million tonnes this year and 8 million tonnes next year. They recently moved metallurgical coal to its top commodity pick, believing that prices may climb another 15 per cent by the end of this year to $US290 a tonne.

Short term supply squeeze

Last week an explosion and fire erupted at Anglo American’s Grosvenor coal mine near Moranbah in central Queensland, requiring an urgent evacuation of the site. Although there were no injuries, the fire has persisted, leading to a shutdown of operations.

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Figure 3: The underground fires could bring an earlier tightening in physical coal markets. Source: AFR

Just a day later, a fire broke out at Allegheny Metallurgical’s coal mine in Longview, West Virginia, also causing another shut down. Together, these two mines represent over 2.5% of the global hard coking coal market.

Earlier that week an accident on the Blackwater railway system disrupted coal exports from Australia’s Gladstone port in Queensland. Morgan Stanley said it could reduce Queensland’s weekly shipments by around 24%, or an estimated 12% of global seaborne exports.

The closures have raised concerns about insufficient supply at a time of growing demand for the commodity, triggering the recent spike in Australian coal futures, resulting in the sector’s recent rally.

Coal power usage in Australia also saw a resurgence in the June quarter, marking its first year-on-year growth in nearly a decade due to a drought in wind power and rising demand.

Data compiled by UNSW senior research associate Dylan McConnell shows a 6.5 per cent increase in coal power generation across the National Electricity Market in the April-June period from a year earlier. This proves while the move to cleaner energy sources is great in theory, it reflects the reliance we have on traditional energy sources to maintain grid reliability.

The renewed strength in prices has ignited a rally in coal stocks, which have been largely overlooked by investors who are becoming more environmentally conscious. Whilst it may be a safer long term bet to look at the growing tech industry and cleaner resources, coal stocks may be overly discounted.

Last week Canada’s federal government approved Glencore’s $6.93 billion acquisition of Canadian miner Teck Resources’ steelmaking coal unit, proving there is still plenty of money in the sector.

Coal miners poised for gains

Whitehaven Coal and Yancoal rose 17.3% and 10.7% respectively last week, with both stocks hitting 52-week highs on Friday. They weren’t the only coal stocks to benefit, with Coronado Global Resources increasing by 13.5% and Stanmore Resources climbing 12.2% for the week. You won’t see new coal mines popping up, meaning it’s the established producers that are set to benefit.

Eventually, demand for coal will decline for good. However this may not reduce its attractiveness to investors, as supply is likely to decrease just as fast.

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Figure 13 Changes in coal production from 2021-2025, with data for 2024 and 2025 based on the IEA’s forecast. Source: International Energy Agency, World Bank.

Despite the 2022 boom in coal price, unlike other commodities that experienced dramatic increases in output, there hasn’t been a similar investment boom. Australia’s coal exports have been on the decline since 2019 due to the bearish long term outlook on the commodity, with many companies looking elsewhere. Not to mention obtaining permits for new coal mines is extremely challenging.

As a result, coal supply could drop significantly and sooner than expected. This could turn coal from a stable short-term investment into a riskier but potentially more lucrative long-term one.

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