Why reports of coal’s death are greatly exaggerated
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As much as it might annoy environmentalists it seems the anti-coal crusade of the past 10 years has produced a perverse result.
Global coal consumption is rising, coal prices are edging back towards record territory and coal mining companies are becoming the invisible stars of the resources sector.
It wasn’t supposed to be like that with coal routinely vilified as the environment’s number one enemy. That’s a view accepted by Australian governments and some in Europe — but not in Asia or other regions with emerging economies, such as Africa.
If US writer Samuel Clemens (also known as Mark Twain) was alive today he might even be tempted to say the same thing about coal as he said about himself: “reports of my death are greatly exaggerated”.
In the case of coal’s resurrection there is no end in sight.
While some investors might be swayed by the environmental protection argument and refuse to buy shares in coal mining companies, there are others trousering fat profits.
The US, where investment trends often start, is where some of the best coal results are being achieved as the mining industry benefits from the pro-coal policies of President Trump.
Peabody Energy and Arch Coal — two of the biggest stock exchange-listed coal miners in the US, have seen their share prices rise by 93 per cent and 30 per cent respectively over the past 12-months.
Both are tipped by Jefferies, a US-based investment bank to be in line for further share price upgrades.
In Australia, the winners from the coal come-back include Whitehaven Coal which has seen its share price rocket from a near-death 38c in February 2016 to recent trades at $5.64 — a rise of 1348 per cent in just over two years.
Then there’s Stanmore Coal which fell to 5c in mid-2015 — and is now trading around 81c, a rise of 1520 per cent in three years.
On the coal market the price of high-grade Australian thermal coal heading for Asia reached $US112 a tonne earlier this week — a 130 per cent increase from the low point of 2016.
South African coal has also hit a six-year high as Asian buyers scramble for tight supplies.
The coal market has grown
China, Korea, Japan and India are all burning more coal today than in previous years and while coal’s share of the energy market in emerging economies has slipped to around 40 per cent from close to 50 per cent a few years ago, it is 40 per cent of a much bigger market.
The forces at work in coal are global, but they are also being felt in Australia as Angela East explains in her story on a very rare stock exchange event — the successful float last week of a new coalmining company, Bounty Mining.
What’s driving coal is the simplest of all economic forces: demand over-powering supply, a trend which has caught coal’s critics by surprise — but one which seems likely to continue.
The reason investors can be confident about coal is that while it is a fuel source which has fallen foul of some governments in the western world, there is increasing evidence that replacement sources of power, such as wind and solar, cannot provide the base-load electricity needed by heavy industry.
The shift to environmentally-friendly renewables is having the same perverse effect on another enemy of the environmental lobby, nuclear power. The US is moving to boost its reactor fleet as the price of uranium shows signs of a sustainable price revival after a decade of decline.
What’s next for the price of coal?
Investment banks are slowly waking to the price-driving effects of mine closures and lack of new investment in supply, and while there is no consensus view that the trend will continue there is equally no case to argue that it will not.
Morgan Stanley, another U.S. investment bank, described coal in a report circulated earlier this month as being “structurally disadvantaged but in short supply today”.
It reckons the current boom in coal prices will not last with a sharp price decline next year.
But even in that sobering assessment is a hidden gem which supports the case for coal with Morgan Stanley noting: “the fact that long-term demand may be less appealing also keeps investment away”.
In other words, fear of a future coal price fall means there is limited investment today, which might actually produce the perverse effect of higher, not lower, prices.
Jefferies said a decline in Chinese demand was a near-term risk to the seaborne coal trade but “a sustainable collapse in seaborne prices is unlikely.
“Longer term, demand growth in India and other emerging markets should more than offset a decline in demand in the developed world and China.
“We reiterate our buy ratings and raise our target prices for Peabody, Glencore and most other coal miners.
Not a short-term blip
To understand exactly what’s happening and why the coal recovery is not a short-term blip, it’s important to first consider the success of anti-coal campaigns which have been a factor in killing a number of coal projects and discouraging equity investors and banks from supporting coal mine developments.
That success has led to this explanation from Jefferies which noted higher coal prices would lead to some supply growth in the seaborne market but…
“A lack of investment in new mines, depletion of existing mines, and under investment in infrastructure have been key factors in coal’s resurgence, and most mining companies are unwilling to invest in new coal capacity due to demand risk and negative investors sentiment regarding coal.”
In other words, the coal revival underway today has its root in the success of anti-coal campaigns such as that mounted against the Carmichael mine which India’s Adani Group wants to develop in Queensland.
In football jargon, that’s what might be called an own-goal.