One way to describe what’s happening to steelmaking coal prices, which is unexpected but not unexpected, is that governments are stifling supply in the face of persistent growth in demand, a perfect recipe for higher prices.
For reference, high-quality dry coking (or metallurgical) coal has risen 9% over the past three months to around $264/t, and will rise another 6% to $280/t ahead of Goldman Sachs’ forecast. year.
For a number of reasons, coking coal and its lower-ranking cousin, thermal or steam coal, are used for electricity production, both by environmentalists and governments to blame for carbon pollution and climate change.
But the banning of mining permits, as is happening in Australia and Canada, lumping all types of coal into one basket and limiting supply growth has the predictable effect of raising coal prices even as thermal coal declines.
The gap and the prospect of long-term growth in demand for coal have sparked corporate activity, with some mining companies quitting coal and others buying more, confident the business has a bright future.
Two recent studies underscore that point, with Whitehaven Coal earlier this year buying two coal mines from BHP in Australia and Glencore leading a syndicate in buying Tech Resources’ steelmaking coal business in Canada.
Investor reaction to the deal has been mixed, but the Tech/Glencore deal has sparked a buoyant stock market reaction, with Tech shares down 6% in the past month and Glencore up 8%, the opposite of what happens during asset trading. The buyer falls, and the seller rises.
Tech’s decline is curious because the $9 billion exit from coal has prompted the administration to invest in other mineral interests, particularly copper, one of the key minerals in the energy transition.
Tech president and CEO Jonathan Price said in a statement last week that the deal will spur the company’s refocus as Canada’s critical metals champion.
“This sale ensures that Tech is well capitalized and will realize value from our core metals business and deliver strong returns to our shareholders,” Price said.
Glencore, with minority shareholders Japan’s Nippon Steel and Korea’s Posco, enjoys a majority ownership of Tech Steel’s coal mining business.
But what seems to have caught the eye of investors is Glencore’s long-term aim to merge the Teck coal mines into an “independent company” that would hold Glencore’s other metallurgical coal assets in Australia and Colombia.
The new business, according to a statement from Glencore CEO Gary Nagle, “will be well positioned as a leading and highly cash-generating wholesale commodity company, with strong product potential and attracting strong investor interest.”
Jefferies is another investment bank that shares Goldman Sachs’ optimism about mining and its outlook for coal.
In a research note published last month, Jefferies said: “The outlook for premium low-volatility benchmark metallurgical coal may be the best of any commodity, but it is seriously undervalued.”