If coal’s crazy 2022 was a wonder to behold and a watershed moment for investors who have spent years chastising the ESG lens that has quickly and loudly engulfed the resources market, 2023 has been a chastening experience for those who thought the incredible run of the world’s most hated commodity to insane levels would continue.

Having ended 2022 at US$394/t, Australian high caloric value thermal coal had fallen to just US$135/t on Friday.

That’s for the premium 6000kcal FOB Newcastle product. At the 5500kcal level, FOB Newcastle tonnes were trading at US$85 a pop, down from US$208 at December 31, its lower percentage fall assisted by returning demand from China after the end of its ban on Aussie coal.

It’s a mindboggling drop. While most in the industry thought it unlikely Australian coal prices would remain above US$400/t, few felt the drop would be so fast and severe through the first half of 2023.

It has followed a big fall in demand for both coal and gas in Europe and elsewhere in the northern hemisphere after a milder than expected winter and cooler than expected intro to summer.

“We were always expecting a price correction but the speed of it and certainly the collapse in gas prices has taken us by surprise,” Wood Mackenzie principal analyst Asia Pacific thermal coal research told Stockhead.

“We expected gas prices to be a lot firmer and coal prices to be a lot firmer as well.

“So we were expecting a decrease, our long term view hasn’t changed.

“So really, this has just changed the trajectory for getting back to what we see as kind of our long term price view in the mid 90s.”

 

A cold shoulder

For fossil fuel producers the Autumn and Spring gaps between winter and summer are the shoulder season, where demand falls as people pack away their heaters and leave their air cons on ice.

Simington says 2023 has seen an ‘extended’ shoulder season which has hurt coal demand in the same regions which powered the commodity’s stunning 2022 performance after Russia’s invasion of Ukraine prompted Euro power plants to turn to the Australian market to stock up.

“I wouldn’t say we’re in shoulder season but it still feels like we are and I think that’s the high stock levels,” he said.

“The stock levels are so high that I just can’t see summer having an impact at all now.

“I think everyone’s already got enough coal for summer so now we’re looking to next winter.”

European power plants have now been looking to trade stockpiled coal purchased in a panic last year to Asia at a loss, with low gas prices and high carbon prices currently providing further disincentive to burn the stuff for energy.

“We have heard that there were some 20 capes (cape size ships) sold out of Europe into Asia-Pac … I guess you could almost point at that and say, look that’s enough to smash prices,” Simington said.

That has dovetailed with rising supply as producers shake off the effect of last year’s wet and woolly La Nina in the southern hemisphere, which along with Covid cases and labour shortages saw Australia’s output tumble from a record 212Mt in 2019 to 199Mt in 2021 and just 178Mt in 2022.

And Australia wasn’t the only place struggling to get product out of port, with export bans in Indonesia and distinct but similar problems cutting supply out of South Africa and Colombia.

Simington says Australia is expected to export around 196Mt of thermal coal in 2023.

 

Volatility is the narrative

Some commentators see the replacement of coal-fired power with renewables and lower emitting fossil fuels like gas as the death-knell for demand in the industry.

But what seems more likely is sudden surges in price when demand does spike, owing to a long-term drought in new coal developments in the face of ESG pressures and credibility issues.

One developer, Simington said, had been unable to find a corporate lawyer to work for the company, with reputational issues and fears over coal’s long term future fuelling labour shortages in what is in general an already stressed mining labour market across Australia.

That will place more pressure on supply, which could in turn exacerbate the price impacts of demand spikes like those we saw in 2022.

“If demand comes back strongly for thermal, or for either type, I just think we’re looking at volatility because … I think I don’t think we’re going to be able to get back to that 212Mt very easily on the thermal side,” Simington said.

“Prices are suffering at the moment and we’re in this kind of super shoulder season if you’d like to characterise it something like that.

“But I just think it’s going to be super volatile going forward as soon as we get demand spikes for whatever reason — maybe I should say when we get demand spikes going forward.

“It’s pretty sad at the moment, but when it does happen, and it will happen, I think prices are just going to go ballistic again.”

 

Met coal continues to remain strong

Met coal prices, which tumbled below thermal for the first time in at least a decade last year as China’s lockdowns damaged demand from the steel industry, have been more resilient.

As of Friday premium hard coking coal out of Queensland was fetching US$227/t, compared to US$265/t at the end of 2022.

That was partly due to China’s reopening and readmittance of Australian met coal after an unofficial two-year ban.

But it is also in part due to heavy rainfall and logistics issues in the Queensland port and rail network.

Those issues have been felt hard by smaller miners and developers. Terracom (ASX:TER) shares sunk 8.5% as of 2.30pm yesterday after it blamed logistics blockages for an expected miss on coal sales from its Blair Athol mine in 2022-23, now forecast at between 1.8-1.9Mt.

Last week Bowen Coking Coal (ASX:BCB) raised $50 million from investors in a bid to fund capital works in the face of constraints logistics issues at port were placing on its exports.

That has created supply problems for Queensland met coal. Not that the Queensland Government will be too concerned. Its budget is out.

Last year’s delivered a shock royalty increase through the introduction of three progressive new tiers, the upper limit capturing for the State 40% of the sale price on every dollar dropped on the State’s coal above $300/t.

Previously producers paid no more than 15% on coal sold at above $150/t. They now stump up 20% beyond $175 and 30% beyond $225, before hitting the aforementioned top rate.

The Maroons were expecting to generate around $1.2 billion extra over four years to 2025-26. In actuality Queensland’s coal royalties pulled in $15.2 billion all up, $10b above last year’s budget prediction.

That’s delivered a $12b surplus, the most of any State or Territory Government ever (read it and weep McGowan … er … Cook).

The news comes a day after the Queensland Resources Council launched a major new ad campaign attacking the policy, described by CEO Ian Macfarlane as a “short-sighted tax grab”.

BHP is yet to announce new capex forecasts for its Queensland met coal business after pulling allocations in protest at the royalty hike last year, but at the same time it is not short of suitors for its Daunia and Blackwater mines, two ops from its BMA JV with Mitsubishi which have been put on the block.

CODE COMPANY PRICE 1 WEEK RETURN % 1 MONTH RETURN % 6 MONTH RETURN % 1 YEAR RETURN % MARKET CAP
NAE New Age Exploration 0.006 0% 20% -33% -25% $ 8,615,393.46
CKA Cokal Ltd 0.1175 -10% -22% -40% -10% $ 124,079,132.70
BCB Bowen Coal Limited 0.17 -23% -23% -39% -51% $ 303,908,253.50
SVG Savannah Goldfields 0.13 -7% -16% -26% -28% $ 27,418,781.32
GRX Greenx Metals Ltd 0.885 12% 16% 57% 321% $ 227,523,273.15
AKM Aspire Mining Ltd 0.06 5% 3% -24% -33% $ 30,965,856.09
AVM Advance Metals Ltd 0.008 0% 0% -11% -33% $ 4,708,469.81
AHQ Allegiance Coal Ltd 0.013 0% 0% -72% -97% $ 13,063,647.08
YAL Yancoal Aust Ltd 4.48 1% -17% -22% -21% $ 6,192,860,959.53
NHC New Hope Corporation 5.32 11% 3% -7% 39% $ 4,764,929,247.00
TIG Tigers Realm Coal 0.008 0% 33% -47% -62% $ 91,466,916.58
SMR Stanmore Resources 2.63 6% -12% 5% 13% $ 2,424,743,495.46
WHC Whitehaven Coal 6.28 6% -10% -34% 18% $ 5,589,554,937.60
BRL Bathurst Res Ltd. 0.84 -9% -16% -4% -37% $ 168,396,606.40
CRN Coronado Global Res 1.385 2% -9% -28% -18% $ 2,321,888,416.05
JAL Jameson Resources 0.07 -7% -7% -42% -7% $ 27,405,777.00
TER Terracom Ltd 0.435 -6% -33% -48% -46% $ 376,454,130.45
ATU Atrum Coal Ltd 0.005 0% 0% -17% -33% $ 6,958,495.86
MCM Mc Mining Ltd 0.14 -7% -26% -42% 15% $ 53,954,802.27
DBI Dalrymple Bay 2.68 2% 5% 14% 32% $ 1,308,810,800.88
AQC Auspaccoal Ltd 0.105 -28% -40% -50% -38% $ 45,150,423.89
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Can Rio crack green steel conundrum?

Iron ore is, like coal, in an interesting position when it comes to the energy transition.

It is an essential ingredient in the EVs and renewables that will be needed for decarbonisation.

But steelmaking accounts for around 8% of global CO2 emissions, and there is little support for the idea that we could shift away from the main form of steel production – the met coal reliant blast furnace – for a few decades.

Indeed, BHP even sees climate change itself increasing demand for steel in a dark, self-fulfilling prophecy. Harsher conditions make for more wear and tear on structure and equipment, heightening demand for replacements.

Rio Tinto (ASX:RIO) is the latest iron ore producer to step up its efforts to unlock the key to so-called ‘green steel’.

This is a matter of preservation for the big iron ore miners. They are looking for ways to use their bog standard 62% Fe iron ore, traditionally not suited to low carbon steelmaking technology, in low emissions processes.

Rio and Chinese steel giant Baowu, a partner in its Western Range JV, have signed an MoU to pursue a number of projects in concert.

One is to research, build and demonstrate a pilot scale electric smelter at a Baowu mill in China using direct reduced iron from Rio’s low and mid-grade ores.

Other initiatives include pelletisation tech for low-carbon shaft furnace-based direct reduction, expanding the development of Baowu’s hyCROF technology to mitigate CO2 emissions in the blast furnace process and the joint study of producing low-carbon iron in WA.

Among the big issues with green steel is that even if we can shift to technologies like hydrogen fuelled direct reduced iron — theoretically emissions free — they would require levels of high grade iron ore production beyond the realms of possibility.

So using the low and medium grade ores that make up most of the supply out of the Pilbara, home to around 60% of the 1.5Btpa seaborne iron ore market, could be key to the decarbonisation narrative for the iron ore and steel industries.

“Rio Tinto and China Baowu are united in a commitment to accelerating the delivery of low-carbon solutions for the entire steel value chain,” Rio’s chief commerical officer Alf Barrios said.

“This MoU aims to address one of the biggest challenges faced by the industry – developing a low-carbon pathway for low-to-medium grade iron ores, which account for the vast majority of global iron ore supply.

“China’s commitment to curbing emissions and promoting high-quality green development is strongly aligned with our own position where climate change and the low-carbon transition are at the heart of our strategy.”

Iron ore prices ran up for nine straight sessions, before falling around 5% on Monday as Goldman Sachs issued a bearish note on the outlook for the recovery of China’s beleaguered property sector.

Domestic property accounts for around 30-40% of China’s steel demand.

CODE COMPANY PRICE 1 WEEK RETURN % 1 MONTH RETURN % 6 MONTH RETURN % 1 YEAR RETURN % MARKET CAP
ACS Accent Resources NL 0.01 0% 0% -60% -83% $ 4,731,272.83
ADY Admiralty Resources. 0.006 0% -14% -25% -54% $ 7,821,474.92
AKO Akora Resources 0.175 -10% 25% 9% -13% $ 18,521,648.73
BCK Brockman Mining Ltd 0.03 0% -14% 15% -14% $ 287,687,196.06
BHP BHP Group Limited 44.29 1% 2% -5% -4% $ 226,543,495,264.32
CIA Champion Iron Ltd 6.07 -2% -2% -16% -18% $ 3,263,488,625.06
CZR CZR Resources Ltd 0.185 12% 6% -27% -41% $ 37,717,543.36
DRE Dreadnought Resources Ltd 0.051 0% -4% -44% 38% $ 179,697,323.88
EFE Eastern Resources 0.012 20% 0% -61% -56% $ 13,661,411.07
CUF Cufe Ltd 0.011 0% 0% -31% -59% $ 10,627,236.02
FEX Fenix Resources Ltd 0.24 2% 2% -4% -23% $ 137,278,051.20
FMG Fortescue Metals Grp 20.8 2% 3% -2% -3% $ 64,011,680,645.22
FMS Flinders Mines Ltd 0.415 0% -6% 6% -3% $ 76,826,102.54
GEN Genmin 0.13 -16% -24% -48% -32% $ 65,436,068.93
GRR Grange Resources. 0.525 -1% -7% -40% -68% $ 619,176,203.43
GWR GWR Group Ltd 0.067 -11% -8% -1% -39% $ 21,521,515.89
HAV Havilah Resources 0.26 0% 2% -22% -10% $ 82,326,194.60
HAW Hawthorn Resources 0.099 5% 41% -21% -1% $ 31,826,483.24
HIO Hawsons Iron Ltd 0.042 20% -11% -58% -91% $ 34,005,629.18
IRD Iron Road Ltd 0.081 -1% -12% -35% -48% $ 65,358,209.23
JNO Juno 0.07 4% 17% -24% -48% $ 9,496,060.07
LCY Legacy Iron Ore 0.017 6% 13% -6% -23% $ 102,509,219.18
MAG Magmatic Resrce Ltd 0.085 -8% -26% -3% 35% $ 27,818,044.62
MDX Mindax Limited 0.071 16% -38% 20% 20% $ 143,189,114.60
MGT Magnetite Mines 0.405 1% -20% -37% -68% $ 31,472,856.74
MGU Magnum Mining & Exp 0.023 -15% -4% 21% -53% $ 17,260,891.85
MGX Mount Gibson Iron 0.39 -4% -8% -27% -42% $ 485,767,733.20
MIN Mineral Resources. 67.92 -3% -8% -23% 20% $ 13,550,751,812.64
MIO Macarthur Minerals 0.22 52% 42% 16% -27% $ 36,443,767.36
PFE Panteraminerals 0.072 -4% -20% -31% -40% $ 3,708,080.64
PLG Pearlgullironlimited 0.033 10% 10% 51% -43% $ 5,005,319.62
RHI Red Hill Minerals 4.5 0% -4% 17% 38% $ 295,524,329.87
RIO Rio Tinto Limited 112.88 1% 5% -3% -3% $ 42,533,953,800.12
RLC Reedy Lagoon Corp. 0.005 -17% -29% -58% -72% $ 2,833,598.01
CTN Catalina Resources 0.003 0% -25% -63% -63% $ 3,715,460.68
SRK Strike Resources 0.062 -9% -10% -32% -57% $ 19,011,250.00
SRN Surefire Rescs NL 0.015 -12% -25% 25% -40% $ 26,421,815.63
TI1 Tombador Iron 0.02 -5% -7% -26% -39% $ 45,141,754.83
TLM Talisman Mining 0.18 6% 6% 33% 13% $ 31,915,714.49
VMS Venture Minerals 0.015 -3% -17% -38% -57% $ 29,250,195.53
EQN Equinoxresources 0.12 -8% 0% 0% -29% $ 5,625,000.13
AMD Arrow Minerals 0.003 -25% -33% -25% 0% $ 9,071,295.29
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