If hard coking coal was a runner in today’s Melbourne Cup the stewards would already have called an inquiry into how a 100-1 long shot six months ago has become a short-odds favourite.
The explanation, as is often the case with horses that fly out of nowhere, is that someone gave it an artificial boost to speed up the price, which has rocketed along from $US90 a tonne in March to well over $US200.
With coal, the hypodermic needle is in the hands of the Chinese government, which forced its domestic coalmining industry to cut the number of days mines can work in a year from 330 to 276.
That classic example of command-economy direction had the desired effect of cutting coal output, partly as an environmental clean-up measure and partly to boost the coal price for loss-making miners.
But it also turned out to be a policy that worked too well, with shortages in the Chinese market for hard coking coal (used to make steel) and thermal coal (used to generate electricity) rising much further than the central government expected.
This has forced coal users into the international market, with Australia a first port of call, especially for hard coking coal (an Australian specialty).
Stocks rocket
The miraculous recovery in coal prices has turned a demonised mineral into the resource sector’s best-performing commodity, leaving previous leaders such as gold, lithium and graphite in its wake.
An upshot of the Chinese-induced coal-price recovery is that the handful of coalmining stocks listed on the Australian stockmarket have surged higher while a group of private coal companies, mostly run by people from earlier coal booms, are enjoying an unexpected boost.
The tearaway leader among ASX-listed stocks is Whitehaven Coal, which has rocketed up from 35c in January to recent sales around $3.15.
New Hope Corporation has also reacted positively to the higher coal price, reaching a 12-month high of $2.13 last week before easing back to $1.75.
Stanmore rushed up from 12c to 84c before easing back to 66c, and Atrum ran from 34c to $1.07 before settling at 75c.
Investment bank analysts who follow coal — and there aren’t many thanks to it being a politically and environmentally incorrect fossil fuel — do not believe that the higher prices are sustainable.
The consensus view of Whitehaven is that it will fall back to $2.46, with Macquarie leading the negative view with a target-price tip of $1.50.
Meanwhile, there is a far more interesting race being run in the background with the gathering of old coal hands making a return to an industry where they made fortunes in the last boom.
Return of the barons
Nathan Tinkler, a man who made a billion dollars and then lost it with ill-timed bets, is back in the game despite being officially declared bankrupt.
Tinkler effectively controls 37 per cent of Australian Pacific Coal, which has risen from half-a-cent to 2.6c, valuing the business at $112 million and his stake at $41m.
The key to Tinkler’s return is the Dartbrook mine in the Hunter Valley of NSW, which was sold to Australian Pacific by one of the world’s mining majors, Anglo American, at the low point in the coal-price cycle as part of a debt reduction drive and because it wanted to focus on diamonds, copper and platinum.
Perhaps the most noteworthy rebound can be found at the ASX-listed Malabar Coal, which has brought together heavy hitters in Hans Mende, Tony Haggarty and Andy Plummer.
Haggarty and Plummer were best known for their leading roles in Excel Coal and the early days of Whitehaven.
Mende is a serial coal and iron ore investor who first made his name as an executive of the German industrial group Thyssen.
In Australia, Mende’s master company, AMCI, has held major interests in a range of companies including Aquila, Felix Resources, Whitehaven and Gloucester.
The keys to Malabar are its undeveloped coking coal project in the Hunter Valley called Spur Hill, which is adjacent to another undeveloped project being offered for sale by Anglo Coal called Drayton South.
The combination of Spur Hill and Drayton South could create a world-class coking coal project, and who better to do that than Mende, Haggarty and Plummer? Malabar has gone from 5c in May to about 21c today.
Despite high-profile coalmine closures such as the impending termination of the Hazelwood mine in Victoria, for true believers in coal the current conditions are the best for five years.
For Australia, the coal-price boom is leading to forecasts of the country’s trade deficit being wiped out, thanks to coal representing 10 per cent of national exports, with the extra earnings a potential threat to the value of the dollar which could be pushed up to US90c (and more) if coal prices stay high.
Exchange rate parity with the US dollar is also a possibility if the coal boom continues.
For environmentalists the return of coal is their worst nightmare. Having demonised the industry as a prime cause of climate change they are now struggling to accommodate the price surge.
Ironically, environmental protesters have played a role in the return of coal with their objections to new coalmines being developed and old mines expanded.
The protests have limited supply — and there’s no better way to create a price boom than reduced supply meeting strong demand. Tim Treadgold is resources writer at www.eurekareport.com.au which is owned by InvestSMART. Reasons for the price recovery
1. China cuts off supply: China has moved to greatly reduce the production of coal,
and plans to cut production by 500 million tonnes over three years.
The plan involves the loss of more than 1 million jobs and the closure of 5000 coalmines.
To top it off, China also announced it would not approve any new coalmines until 2019. The government planned to cut back on coal activities to reduce oversupply and to help improve the environment, and parallel plans were made to transition workers to new industries. Global demand for Aussie producers: The sheer scale and relative speed of the Chinese moves to cut down on coal production immediately changed the balance within the global coal industry. Australian coal, which is among the best quality coal in the world, immediately received a boost.
Nippon Steel of Japan recently agreed to a massive price increase put through by Australian coal producers.
The steelmaker, which had been paying just $US93 at tonne in September, signed along the dotted line for coal at $US200 a tonne in the December quarter. Coal remains hugely important to our balance of trade.
According to Austrade, coal represents 11.6 per cent of Australian exports of goods and services. Green opposition: Strong community opposition to coal projects, coupled with high-profile rejection of coal investments by some leading funds, has affected coal supply.
Even funds originally linked with fossil fuels, such as the Rockefeller Family Fund or Norway’s Sovereign Wealth Fund, have ensured limited development of new coal projects through major divestments. Norway alone announced the sale of $8 billion worth of coal shares last year.
The reduction in the supply of coal, often driven by environmental activism or “ethical investing”, has, at least in the short term, partially underpinned higher prices for the commodity.
ATU Price at posting:
77.0¢ Sentiment: Buy Disclosure: Held
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