Unintended but not unexpected is one way of describing what’s happening to the price of steel-making coal as governments suppress supply in the face of steady demand growth, a perfect recipe for a higher price.
On cue, high-quality hard coking (or metallurgical) coal has risen by 9% over the past three months to around $264 a tonne, and is forecast by Goldman Sachs to rise by another 6% to $280/t before the end of the year.
Multiple factors influence the price of coking coal and its lower-grade cousin, thermal or steaming coal used in the production of electricity, with both blamed by environmentalists and governments for causing carbon pollution and climate change.
But lumping all forms of coal into the same basket and limiting supply growth by withholding mine development approvals, which is what’s been happening in Australia and Canada, is having the predictable effect of driving up the price of coking coal even as thermal coal falls.
The gap, and the promise of long-term demand growth for coking coal, has sparked a burst of corporate activity as some mining companies concerned about the outlook for coal quit and others, confident that the business has a bright future, buy more.
Two recent case studies highlight that point with Whitehaven Coal buying two coking coal mines from BHP in Australia earlier this year, and Glencore leading a syndicate which is in the process of buying the steelmaking coal business of Teck Resources in Canada.
Investor reaction to the deals has been mixed but the Teck/Glencore transaction has produced an interesting stock market reaction with Teck shares slipping 6% lower over the past month and Glencore rising by 8%, the opposite of what normally happens in an asset transaction when the buyer falls, and the seller rises.
The Teck decline is also curious because its exit from coking coal has generated $9 billion which management proposes to invest in other mining interests, especially copper which is one of the key metals in energy transition.
Jonathan Price, president and chief executive of Teck, said in a statement last week that the deal would be a catalyst for the company to re-focus as a Canadian critical metals champion,
“This sale will ensure that Teck is well capitalized and able to realize value from our base metals business and deliver strong returns to our shareholders while maintaining a strong balance sheet,” Price said.
Glencore has a different view, delighted to become the majority owner of Teck’s steelmaking coal business with Japan’s Nippon Steel and Korea’s Posco as minority shareholders.
But what appears to have caught the eye of investors is Glencore’s long-term aim of incorporating the Teck coal mines into “a standalone company” which will also contain the other steelmaking coal assets of Glencore in Australia and Colombia.
The new business, according to a statement by Glencore’s chief executive Gary Nagle, “would be well positioned as a leading, highly cash-generative bulk commodity company, likely attracting strong investor demand given its yield potential”.
Jefferies is another investment bank which shares the optimism for coking coal seen by Goldman Sachs and concern for the outlook for thermal 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 also seriouslyt underappreciated”.