Hmmmm, I must say that I'm a bit bemused by the current strength...

Hmmmm, I must say that I'm a bit bemused by the current strength in the coal price, which is fast approaching record high's.

Which - counterintuitively - is not necessarily a good thing because it could result in the coal price upswing being shorter in duration than it otherwise might have been.

My sense is that anything much above US$100/t for a sustained period of time is sure to bring on new capacity from somewhere around the globe, if not from the "mature" producing countries such as Australia, Colombia, South Africa and the US/Canada, then from countries which are not constrained, either by ESG obligations or limited reserve availability, for example Indonesia and Russia.

As it is, Indonesia and Russia are already forces to be reckoned with in terms of global seaborne exports of thermal coal, together they represent almost 60% share of the global seaborne thermal market:



My "supply side shock" thesis provides for a more moderate, orderly rise in the price of coal, which would keep new capacity from "rogue" producers at bay.

In terms of supporting equity valuations, a longer-duration cycle, but at lower prices is far preferable than a short-lived spike (which is what we might have now), followed by a share drop if supply is enticed to respond.

Graphically, the area under the price curve is a proxy for cash flows and in the schematic representation of two different coal price cycles (A being a short-lived with intense price spike and B being a more orderly cycle of longer duration, albeit reaching a lot lower peak levels):



I fear that its all happening too fast and that, instead of the shareholder value maximising price cycle B, we may be setting ourselves up for price path A.

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