Coking coal

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: market data; table compiled by Barry Sergeant

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