Bulk Buys: Will action on climate change end coal? It sure ain’t happening yet

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On the morning people around the world digested the latest report from the Intergovernmental Panel on Climate Change, which contained the bleakest picture of the impacts of global warming yet, coal stocks continued their march north.

Whitehaven Coal (ASX:WHC) was the most notable gainer, rising 6% ahead of its earnings results, as demand for thermal and coking coal continued to remain strong.

Thermal coal makes up around 60% of Whitehaven’s sales mix, which includes the Gunnedah, Narrabri, Tarrawonga and Maules Creek mines in New South Wales. It wants to open the new Vickery mine there and the $1 billion Winchester South mine in Queensland’s Bowen Basin.

As the commodity comes under fire from opponents of the coal power industry, the miner has maintained its line of “high energy coal” is reducing emissions for customers, after receiving a notice from activist investor group Market Forces that will put a resolution to its October AGM to force the company to disclose how it will align its business with net zero by 2050 targets.

“One of our objectives is to meet projected increases in energy demand in our near region arising from continued population growth and economic development while making a practical contribution to global carbon emissions reduction efforts,” the company’s board said in a statement.

“We seek to do this by combining low ash, low sulphur and high-energy coal with some of the most technologically advanced, highest efficiency and lowest emitting power stations in operation.

“Longer term demand for Whitehaven’s high quality coal is an important aspect of our customers’ emission reduction plans because of the improved efficiency Whitehaven’s coal brings.”

Coal is still in the sweet spot with coking coal prices defying steel production cuts in China that have taken a scalpel to iron ore prices.

Hard coking coal FOB Dalrymple Bay was up US$3/t to $189.41/t on Friday. While Australia exports are not fetching as much as other countries are due to a Chinese import ban, they have found alternative markets.

Thermal coal was up 3.8% to US$167.05/t.

Aussie and US coal miner Coronado Global Resources (ASX:CRN) reported its half-year results on Tuesday, attributing improved trading conditions towards the end of the half – which have continued into the September Quarter – for a 22% drop in net losses from $122 million this time last year to $96 million this year.

“As we look to the second half of 2021, we are buoyed by the prospect of prolonged higher metallurgical coal prices as steel demand continues to rise faster than supply growth driven by ongoing robust industrial output,” Coronado managing director Gerry Spindler said.

“Coronado is well positioned to improve production rates and lower costs in the second half of the year, allowing us to take advantage of the higher prices and to continue our trajectory of increasing liquidity and reducing net debt.”

China’s coal imports soar in July while iron ore slips

ASX coal stocks

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It was a tale of two commodities for coal and iron ore in China in July, with the first signs of waning demand for the steelmaking ore emerging following China’s attempts to “jawbone” down iron ore prices.

Chinese trade figures for July showed coal imports lifted 16% year on year and 6% month on month on the back of summer demand and issues with domestic supply.

“Low inventories are exacerbating the tightness in China’s coal market,” Commbank analyst Vivek Dhar said.

“Coal stockpiles held at six major power generators in China fell to 14 days of consumption by the end of July – the lowest level since February 2018.

“We think China’s coal imports are likely to ease after the summer period ends, local coal mines are re‑opened and reserves are added to avoid power shortages.”

Iron ore imports meanwhile slid below the 15-year growth trend to their lowest import level in 16 months, data that coincided with a drop of around US$50/t in the benchmark 62% iron ore price over the past fortnight to under US$170/t.

Even more evidence of Chinese demand for #ironore slumping as global supply rises. July China iron ore imports on seasonally adjusted basis 16m low; combined July Brazil + Australia iron ore exports 7m highs & well above seasonal trend. Got to be yet another strike for iron ore. pic.twitter.com/vGwpEhMpvO

— Robert Rennie (@Robert__Rennie) August 8, 2021

Vale shipments disappoint in July

As Morgan Stanley analysts Marius van Straaten and Susan Bates noted this week, demand side iron ore bear markets tend to be short-lived in line with Chinese steel production numbers.

Many analysts believe curbing production could give rise again to booming steel prices, resulting in unwanted inflationary pressures downstream for the Chinese construction and infrastructure sectors.

That could see China relax policies to reduce steel output by as much as 12 per cent through the second half of the year.

Morgan Stanley view oversupply as a bigger factor for a longer lasting downturn, although it should be noted that at current price levels iron ore producers are still enjoying historically high margins.

That would rely in particular on Brazil’s crisis-plagued Vale to ramp production up to its target levels of 400Mtpa by the end of 2022.

However, it has so far proved incapable of achieving that, with production from the Brazilian major slipping again in July.

Exports from Vale’s Ponta da Madeira port in northern Brazil, one of the world’s largest iron ore and manganese loading terminals, underwhelmed to the tune of 21%.

Through the first seven months of the year Vale has undershot its 206Mt export target by 14Mt to its lowest levels in four years.

As Fastmarkets index manager Peter Hannah noted in an interview with Stockhead last week, Vale has long struggled to bring on the supply needed to “flood” the Chinese end market.

“The iron ore cavalry hasn’t quite been as much as you’d expected,” he said.

“Most of the majors have slightly disappointed on the output numbers in the last quarter and shipments from Brazil in July I think were down year on year.

“So everyone’s expecting this big flood of iron ore to come from Brazil. It hasn’t happened yet and actually it was down in July.”

High grade iron ore can seize the initiative in carbon conscious world

ASX iron ore stocks

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Demand for high grade ore has tracked downwards with the rest of the market over the past week, but its future is looking brighter as the steel industry mulls the need to reduce emissions after the release of the IPCC’s Sixth Assessment Report.

That saw IPCC scientists declare a “Code Red” on the climate situation. But steel production and demand, responsible for 7-odd per cent of global CO2 emissions, is continuing to rise.

Even if overall iron ore demand slides as scrap recycling increases, Wood Mackenzie analysts believe high grade premium pellets could see demand growth as great as 35%.

That may be part of a raft of measures rolled out across the steel sector to reduce emissions enough to help the world hit Paris Agreement below-2°C warming targets.

WoodMac head of iron ore research Rohan Kendall called it “a huge opportunity for suppliers of premium iron ore.”

Hannah also said high grade producers would have an advantage in a future market.

“Average price levels are still super high and the levels we’re at now were all time highs just a few months ago,” he said.

“The theme of the world needing steel, the green steel transition happening is still intact and the important thing is grade really.”

Fe Limited is one company that should receive a premium for its 64% lump iron ore product from the JWD deposit, announcing plans yesterday to hedge the first three shipments from the Mid West mine to provide downside protection on the iron ore price.

The Tony Sage chaired junior, which is supplying iron ore through a pre-payment deal to Glencore, will hedge the first 150,000t of fourth quarter shipments with a floor price of US$153/t and ceiling price of US$199/t on the 62% fines index.

According to Fe it will also receive the lump premium on top of the hedged price.

The first shipment of JWD ore from the Port of Geraldton is expected to occur in September after its haulage contractor suffered delays in getting truck drivers from the east coast due to Covid-related border closures.

At Stockhead, we tell it like it is. While Fe Limited is a Stockhead advertiser, it did not sponsor this article.

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