Coking (metallurgical) coal prices are on the rip, given further fillip by the devastating floods in eastern Australia, but what does the trend mean for investors? Most of the world's exported coking coal is tied up in the mix of commodities produced by diversified miners.
The world's five biggest coking coal exporters rank as BHP Billiton (No 1 by far), Teck, Xstrata, Anglo American, and Rio Tinto. Pure play, current producers of hard coking coal (the premium product) are unusual; Canada-listed Grande Cache is notable not only for that rare status, but also because its relatively high cost structure provides investors with significant leverage to rising coking coal prices.
Coking coal's fortunes rest mainly with changes in downstream demand for steel. The specialised coal, essentially a desiccated coal with high calorific value, is used mainly in smelting iron ore in blast furnaces.
During 2010, benchmark contract coking coal prices increased from around USD 180 per tonne to recent levels around USD 250/t. While some speculators see spot coking coal prices moving up to as high as USD 500/t, a reasonable level for contact prices, all else being equal, and in the absence of extraordinary circumstances, would be around USD 220/t, according to forecasts recently published by RBC Capital Markets.
The state of Queensland, Australia, normally produces around 50% of the world's exported coking coal. It is home to the giant Central Queensland Coal Associates (CQCA) joint venture, 50:50 owned by BHP Billiton and Mitsubishi Development, also joint owners of the Gregory joint venture; BHP Mitsui Coal Pty Limited is held 80% by BHP Billiton and 20% by Mitsui & Co. BHP Billiton also owns and operates another big coking coal producer, Illawarra Coal, New South Wales.
In its financial year to 30 June 2009, BHP Billiton earned USD 4.7bn in underlying earnings (before interest, depreciation and tax) from coking coal, placing the division second on this front only to iron ore. The comparative number for the 2007-2008 financial year was USD 937m, and for 2009-2010, USD 2.1bn.
Significant new entrants to coking coal include Vale's Moatize, in Mozambique, and, not too far away in the Tete province, Australia-listed Riversdale Mining, under bid from Rio Tinto, but clearly a possible target for other potential bidders.
Vale ranks No 1 in seaborne iron ore, and like Rio Tinto and BHP Billiton, No 2 and No 3, would become yet more competitive if it offered its customers "steel packages", which include iron ore, coking coal, and additives such as manganese, molybdenum, ferroalloys and nickel.
BHP Billiton is currently looking at four potential coking coal developments in the Bowen Basin, Queensland: Daunia Coal Mine (greenfield project), Caval Ridge Mine (greenfield), Goonyella Riverside Mine Expansion (brownfield), and Hay Point Coal Terminal Expansion (brownfield).
Then there is the Indomet Coal project, which includes the Maruwai and Juloi metallurgical coal concessions, discovered by BHP Billiton in the 1990s in Kalimantan, Indonesia. A 25% interest in the project was sold in 2010 to a subsidiary of PT Adaro Energy TBK. BHP Billiton retains 75% and remains busy with study work to identify development options.
The global coking coal story presents a picture of a relatively exclusive club. Most mined coal falls into the category of steam coal (also known as energy or thermal coal), and goes into power plants to heat water. Steam coal comprises a far larger market, where much of the commodity remains inland, where it is often subject to pricing pressure from political elements.
Coking coal is far closer to private enterprise. It is more limited in terms of known resources, such that supply growth will remain constrained; as in all bulk commodities, potential infrastructure limitations also apply. The bottom line: coking coal markets are likely to remain tight.
Selected coking coal players
Includes diversified stocks
Stock | From | From | Value | |
price | high* | low* | USD bn | |
| BHP Billiton | GBP 24.57 | -7.2% | 46.4% | 237.493 |
| Teck | USD 62.90 | -3.8% | 121.7% | 36.518 |
| Xstrata | GBP 14.74 | -6.6% | 77.1% | 69.530 |
| Anglo American | GBP 32.88 | -5.2% | 48.8% | 70.255 |
| Rio Tinto | GBP 43.68 | -5.5% | 58.8% | 143.499 |
| China Coal | CNY 10.17 | -24.9% | 26.5% | 14.115 |
| Shanxi Xishan | CNY 25.63 | -16.4% | 55.8% | 12.248 |
| Cliffs Natural | USD 88.84 | -1.2% | 127.0% | 12.034 |
| Coal & Allied | AUD 126.93 | -3.8% | 62.6% | 10.925 |
| Raspadskaya | USD 7.47 | -4.5% | 93.5% | 5.833 |
| Walter Industries | USD 128.95 | -7.9% | 123.8% | 6.821 |
| Kailuan | CNY 18.89 | -23.4% | 59.7% | 3.537 |
| Aquila | AUD 9.44 | -8.4% | 46.0% | 3.513 |
| New World Resources | GBP 10.22 | -6.5% | 84.6% | 4.300 |
| Macarthur | AUD 13.50 | -21.4% | 56.6% | 4.019 |
| Hidili | HKD 7.30 | -23.0% | 35.2% | 1.934 |
| Southern Kuzbass | USD 51.50 | -6.4% | 39.2% | 1.860 |
| Banpu | THB 834.00 | -3.9% | 66.4% | 7.413 |
| Shanxi Coking | CNY 25.63 | -16.4% | 55.8% | 12.248 |
| Coal of Africa | ZAR 12.10 | -32.8% | 60.3% | 0.931 |
| Gloucester Coal | AUD 13.60 | -0.8% | 88.2% | 0.290 |
| Consol Energy | USD 51.74 | -6.6% | 66.5% | 11.685 |
| Alpha Natural | USD 59.04 | -13.2% | 84.5% | 7.109 |
| Patriot Coal | USD 24.52 | -10.3% | 151.2% | 2.231 |
| Western Coal | CAD 12.34 | -3.1% | 316.9% | 4.375 |
| Int'l Coal | USD 9.02 | -10.0% | 168.5% | 1.839 |
| Grande Cache | CAD 10.97 | -8.0% | 163.7% | 1.088 |
| Puda Coal | USD 13.79 | -18.7% | 187.3% | 0.410 |
| Americas Energy | USD 0.45 | -91.7% | 9.8% | 0.033 |
| Rocklands Richfield | AUD 0.16 | -61.0% | 23.1% | 0.056 |
| SinoCoking | USD 13.05 | -75.7% | 272.9% | 0.272 |
| Xingjiang Int'l | CNY 13.15 | -32.9% | 82.9% | 0.960 |
| Gujarat NRE | INR 63.85 | -25.7% | 25.1% | 0.712 |
| Nippon Coke | JPY 178.00 | -9.6% | 83.5% | 0.520 |
| Averages/total | -17.5% | 90.3% | 690.605 | |
| Weighted averages | -7.6% | 59.3% | ||
| * 12-month |
source
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