Unintended but not unexpected is one way to describe what is happening to the price of steel-making coal as governments clamp down on supply in the face of steady demand growth, a perfect recipe for a higher price.
On cue, high-quality coking (or metallurgical) coal has risen 9% in the past three months to around $264 a tonne, and Goldman Sachs forecasts a further 6% rise to $280/t before the end of the year. year.
Many factors affect the price of coking coal and its lower cousin, thermal or steam coal used in power generation, both of which are 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 approvals for mine development, as is happening in Australia and Canada, has the predictable effect of raising the price of coking coal, even as thermal coal falls.
The gap and the promise of long-term growth in demand for coking coal has sparked a burst of corporate activity as some mining companies concerned about coal’s prospects exited and others confident the business had a bright future bought more.
Two recent cases highlight this point with Whitehaven Coal buying two coking coal mines from BHP in Australia earlier this year, and Glencore, a leading syndicate which is in the process of buying Teck Resources’ coal-to-steel business in Canada.
Investor reaction to the deals has been mixed, but the Teck/Glencore transaction has sparked an interesting stock market reaction, with Teck shares down 6% in the past month and Glencore up 8%, the opposite of what would normally happen in a transaction with assets when the buyer falls and the seller rises.
Teck’s decline is also curious because its exit from coking coal has generated $9 billion that management is proposing to invest in other mining interests, particularly copper, which is one of the key metals in the energy transition.
Jonathan Price, Teck’s president and CEO, said in a statement last week that the deal will be a catalyst for the company to refocus as Canada’s 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 takes a different view, content to become the majority owner of Teck’s coal business with Japan’s Nippon Steel and Korea’s Posco as minority shareholders.
But what appears to have caught investors’ attention is Glencore’s long-term aim to spin off the Teck coal mines into a “stand-alone company” that would also contain Glencore’s other steelmaking coal assets in Australia and Colombia.
The new business, Glencore chief executive Gary Nagle said in a statement, “would be well positioned as a leading, highly cash-generating bulk commodity company, likely to attract strong investor demand given its profitability potential”.
Jefferies is another investment bank that shares the coking coal optimism observed by Goldman Sachs and the concern about the outlook for thermal coal.
In a research note published last month, Jefferies said: “The outlook for low-volatility premium metallurgical coal may be the best of any commodity, but it is also seriously undervalued.”