The price of high quality thermal coal can remain stronger for longer, according to miner and commodity trader Glencore, as production of the fossil fuel struggles to keep up with demand.
In a presentation handed to analysts during a site visit on Wednesday, Glencore said an extra 1bn tonnes of coal fired-power capacity was either under construction or permitted, mainly in Asia, yet supply growth was stagnant.
Thermal coal is burnt in power stations to generate electricity. The sector is a no go-area for many banks and investors who are trying to burnish their environmental credentials by shunning fossil fuels. As a result there is a lack of investment in new mines at the same time as a fleet of new coal plants have, or are set to come on line in Asia and the Middle East.
These dynamics have already helped push up the price of high grade Australian thermal coal — the benchmark material for the vast Asian market. It has significantly outperformed other commodities this year, surprising analysts, many of whom have much lower coal prices in their models.
Prized by Japanese and South Korean utility companies, the high grade version of the fuel, which is more efficient and less polluting, has traded above $100 a tonne since May and hit a six-year high of $119 a tonne in July.
Glencore reckons the price could remain elevated. Of the 1bn tonnes of additional coal needed to fuel coal-fired power plants either under construction or permitted, it reckons 40 per cent would have to come from the 917m tonne a year seaborne market, illustrating the size of the challenging facing the industry if it does not invest in new mines.
“Glencore calculates that 40-50m tonne of new coal needs to come into the seaborne market per year over the next 5 years and there are few coal mine expansions under way, an anomaly for coal market cycles,” said Tyler Broda, analyst at RBC Capital Markets.
“We see upside to current 2019 consensus prices of $94.9 a tonne.” To put those figures in perspective the size of the seaborne thermal coal market is just over 900m tonnes.
Paul Gait, analysts at Bernstein Research said: “The fact is that governments won’t approve new coal mining projects, boards of mining companies won’t sanction the expenditure, and banks are not prepared to lend to the sector! It is this change in the pattern of deployment of capital in the industry that paves the way for structurally higher prices.”
If prices hold up, Glencore says its coal business could generate $6.2bn of earnings before interest, tax, depreciation and amortisation next year, putting it on course to eclipse its copper unit as the biggest source of group profits. The company expects to mine 145m tonnes of coal in 2019 at a cost of $49 a tonne, a $3 improvement on 2018.
“Coal-fired power plants in Asia could have a 27 per cent lower carbon footprint by using Glencore’s coal and higher efficiency coal plants compared to Indonesian coal and the global average coal thermal efficiency of 35 per cent,” said analysts at Barclays.
During Wednesday’s visit to its thermal coal mines in Australia’s Hunter Valley, Glencore said it expected to achieve $450m of annual savings from its coal division by the end of 2018, up from an original forecast of $300m.
The company also provided further detail on a new mine plan for Hail Creek, a coking coal mine it purchased from Rio Tinto earlier this year.
Glencore is unique among its peers group in that it operates at both ends of the carbon spectrum as the world’s largest seaborne coal exporter and a top supplier of copper, nickel and cobalt — key materials in the battery packs of electric vehicles.
However, some analysts believe Glencore is becoming a more challenging company to own for big pension funds who have strong ethical, or environmental, social and governance mandates because of its thriving coal business.
In a recent report, analysts at Deutsche Bank said Glencore should reposition it's the coal unit as a cash cow to fund its dividend and “green growth elsewhere in the group.