"I find that the thermal coal price story for the 2 main Australian miners is so convincing, that I try to find what could go wrong with this story."
Same. However i'll add my thoughts.
To me coal is definitely here to stay for at least a decade or two. Whatever energy source that they choose to replace it with will take a minimum of 5 years to build anyway. I used to think met coal would stay longer as its used in steel production, but it seems possible replacements are closer than i thought. (links below)
My five biggest potential issues;
- Global recession. - The world isn't in a great place. Two largest economies are in serious debt issues. (USA Gov, China provinces). Inflation rising. Loose money policies. Covid ongoing, stimulus spending could end.
- Market crash. - Record stock market prices. Issues as per above. China stopping construction and directly manipulating their home markets could have unintended consequences. Covid 2.0 or other issues.
- Normalcy. - Prices returning to their long term average. Along with the continuing threat of ESG concerns and the threat of closing coal mining at anytime weighing on share prices.
- Disruptors. - Coking coal being replaced by hydrogen. (5 yrs away). Thermal coal being replaced by thorium nuclear (12years away). Others?
- High prices. - "The cure for high prices, is high prices". If coal stays elevated, the switch to others options will be swifter, and government indecision will be removed.
I will address your points a little.
"saintex - sudden political decision to stop coal mining (earlier than expected) given the pressure from ecologists;"
I do not rate this highly. I'll talk about this a bit as its probably more controversial.
Australia specific - For two reasons; - It earns Australia a lot.
- Socially it would be a hard sell to kill coal mining while keeping coal power plants open. And we can't remove coal power fast.
Earnings. Australia isn't going to get rid of their 2nd biggest income earner. The only way i can envision a future where it might, is if iron ore sat at records for 3 years, and the talk would inevitable (and foolishy) start saying that this was 'the new normal'. Governments would start believing this narrative, as Australia would be rolling in excess cash, and the income from coal would seem less important. While killing coal would So decisions would be made to close the sector and move on. However, i don't see something like this happening anytime soon, the recent crash has helped to show that.
I can not see a government being able to kill coal mining companies, yet leave coal plants open. It's either both, power stations first followed by coal mines, or none. With that, Australia simply can not replace it's power stations fast. Even if its announced today, it will be 5 years before we can actually turn them off.
Gas plants take time. Enough solar/wind/battery/other storage to replace it seems unlikely. Nuclear takes time, (and is currently not possible)It's amazing how fast England went from 35% coal to (essentially) zero. (link below)
But even that was 5 years. And they had a few advantages that we don't. They have nuclear. And they can just import power from France (which they do for about 5%? atm) so they always had a fall-back plan for when renewables aren't producing. We don't have either luxuries.
Hence coal plants in Aus will take time before they are decommissioned.
If you were talking Worldwide and not Australia. Well it all comes down to China#1, India#2, (then rest of Asia #3, then USA #4).
- China is the largest coal miner and user. Their coal power station fleet is very new. They use about the same as the rest of the world combined. Its also still growing. I just can't see China unilaterally deciding to stop coal overnight until they have something to replace it with. Wind/solar isn't really viable (they have some HUGE wind farms but they aren't near populated areas, and aren't yet connected to those areas to be fully utilized etc.) I dont see them replacing coal until 2050 with some new power source. (likely thorium nuclear (link below), or just normal nuclear) to meet their 2060 climate deadlines. (if they even bother abiding by it)
- China - As of last year they had 992GW of coal power. 99GW under construction and 105GW more planned. (To put that in perspective Aus had 5.5GW
- The only way i can see china swapping coal early, is if coal prices stay insanely high for a few years. Then i can see them simply decide to go nuclear overnight)
- India is #2 user, it's poorer. And is growing fast. As of last year they had 229GW of coal power. 36GW under construction and 29GW more planned. ATM improving their lives is more important than the CO2 problem.
One caveat - If the first world countries were all unified, and decided to stop India going further down the coal path, i could see them paying and building a tonne of nuclear plants for India. Else some billionaire just having a change of heart and wanting to change the world. ie Jeff bezos could do it by himself if he wanted.
However. Unless China join the party. Nothing else is really going to matter. I don't see them joining the party.
"saintex - carbon tax."Tax's come and go. A few states added additional taxes recently to iron ore, they complained, but in the end paid. It's the cost of business.
"saintex - deep recession which would have a significant impact on Asian demand," Agreed.
"saintex - switch to other sources of energy if it becomes more economical"
Agreed, but they need China. (as per above) I don't see how its possible to replace coal with current technologies unless its nuclear or some derivative, or some entirely new energy source. There is just too many GW's in coal, and too much of the world wanting more electricity. (Africa, Asia). There simply can't be enough gas to go around as a replacement even if its just to substitute mass solar/wind for when its not producing. While biomass shouldn't even be considered as renewable as although its renewable its worse than coal.
"saintex - difficulty for their customers (Asian power plants) to fully pass the increase of coal prices"
This (i believe) is very China specific. And WHC/NHC aren't exporting to china. Also lets pretend coal demand will continue for 100 years. Prices will stabalise over the long term simply from Mongolia ramping up production, they have huge reserves, and close proximity. What they didn't have was transport infrastructure which is being improved. Also Russia is increasing port capacity to export more. Indonesia will likely mine more. So supply is still there, just not from western countries. This is also why i dont buy the narrative that the current huge prices are the new normal.
Having said that, WHC/NHC and other high cal coal miners are in a good spot, as their coal can be blended with others for whatever metric is needed by customers. Its also needed by the newer advanced coal plants. (japan/korea) who are their bigger customers. So they won't be as affected.
Other thoughts - Coal Price ExpectationLong term.
- Long term. I expect the average price to return. Reasoning was mentioned above. But its always better to expect the worst, and just tread any high prices as an additional bonus.
- Short term (6m-1y)China is already low on coal. Some power plants have run out. Others have less than a week of supply. Normally at this time they have larger supplies in preparation for winter. Winter heating season starts November 15 and runs to March 15. So thats only 2 months away, low stocks, and high demand incoming is going to help keep demand - and thus coal price elevated for a while. The reasons have been talked about a lot. Low rain resulting in poor Hydro output. Closing coal mines for a month for their anniversary. Closing mines for safety and for investigating high prices. Australian trade embargo. Rain in Indonesia. High gas prices and shortages causing countries to restart coal plants in Europe.
Other thoughts - Why i bought. When will I sell?I simply liked the price disparity compared to spot prices. The SP was just absurd even when taking into account normal long term average coal prices, yet coal prices were (at the time - ie 4 months ago) at or near 2018 levels. So it was obvious there was a disconnect there. Over time, that just increased more and more, to where we are today. Now, Coal prices are at record highs, and SP is starting to catch up, even so, it still seems to be either assuming coal prices plummeting back to averages, or coal having an expiry date within about 5 years.
For me, I am simply holding until at least the half year financials (late Feb 2022). As that will be the first financials reported since the price surge has flowed into their balance sheets (due to the lag in spot prices vs price achieved). At that time I will re-evaluate.
Links
Disruptors - Thermal Coal & Met Coal
