Friday 18 December 2020
If there’s an area of the market that was definitely for the contrarians in the middle of 2020, it had to be the coal miners. Not only had coal become politically incorrect, but prices for this commodity were lousy. Coal is still unmentionable in certain influential circles. But prices are no longer lousy. That means good times for shareholders of ASX-listed coal producers, whose multiples are still very low, in our view.
In certain investor circles coal has become as pariah in 2020 as South African companies in the 1985 and tobacco companies in 1995. The push is on for global institutional investors to divest themselves of coal, because it is perceived to be ‘bad for the planet’. And certain institutions are obliging, most notably Blackrock, which in January 2020 told the world it was getting out of this sector.
Prices have rebounded strongly
At the same time as it became hard to mention coal in certain circles, prices were lousy for the commodity. Coal prices these days are set on GlobalCOAL, the world’s leading online coal trading platform for physical coal, while the Intercontinental Exchange (ICE) has futures contracts based on globalCOAL benchmarks. Probably the most followed coal price in the world today is the globalCOAL Newcastle Coal Futures contract, which is based on coal leaving Newcastle, the major Australian coal port 200 km north of Sydney. On globalCOAL and ICE, Newcastle Coal Futures went through a five-year bear market from 2011 to 2016, from US$130 a tonne all the way down to US$50 a tonne. A rally from 2016 to 2018 took Newcastle Coal back up to US$110, after which the market slumped back to close to US$50 a tonne by the middle of 2020.
Coal has since rebounded quite strongly. China is the world’s largest importer of coal, even though that country produces a fair bit of coal itself. When China sought to reboot its economy post-COVID it needed a lot of coal. The result was another coal rally. Newcastle Coal just passed US$80 a tonne.
This rebound is great news for Australian coal exporters, even though, in December 2020, it coincides with an apparent ban by China on coal imports from Australia. That ban is part of an ongoing diplomatic row between Australia and China that has been big news for months now and has featured trouble for Australian exporters to China of a range of commodities, from barley to beef to wine.
We’ll just sell more to other countries
The reason why the Australian coal industry has little to fear from a Chinese import ban is that China is only Australia’s second largest export destination. In 2019 China took A$13.7bn worth of Australian coal exports, but Japan took A$17bn. Other major customers include India (A$10.5bn), Korea (A$7.1bn) and Taiwan (A$5.3bn). Basically, the industry has other countries it can ship coal to and life can go on as normal, with perhaps a month or two to re-route the bulk carriers.
So, the good times are back for the coal sector and are likely to stay so as global economic growth resumes in 2021. Now comes what we expect will be a share price re-rating for a sector that had been battered badly down to very low multiples. For instance, you can currently get Whitehaven Coal at an FY23 EV/EBITDA multiple of just 5.1x, while New Hope is going for 5.3x on FY23 numbers.
We’ve written a lot about coal in Stocks Down Under in 2020. We wrote about New Hope (NHC) on 7 January, Bathurst Resources (BRL) on 8 January, Stanmore Coal (SMR) on 22 January, Tigers Realm Coal (TIG) on 28 January, Whitehaven Coal (WHC) on 2 April, TerraCom (TER) on 17 February and 18 May, Atrum Coal (ATU) on 4 June, Coronado Global Resources (CRN) on 23 July, Montem Resources (MR1) on 24 September and, most recently, Yancoal (YAL) on 14 December.
Black coal should be good for a few more decades
Now, don’t get us wrong. Coal is not a strong growth commodity like nickel, copper or lithium. Metallurgical coal has a decent future, because the world still needs a lot of steel and will continue to need a lot of steel for the foreseeable future. But balanced against this, the producers of thermal coal, used to fire power stations, will likely be impacted by the rise of renewable energy, which we are in the early stages of right now. Overall, coal is expected by some observers to more or less stay steady over the next couple of decades unless governments worldwide intervene to force a major transition away from coal. If coal demand stays steady, that’s a good couple of decades for quality producers, like Whitehaven and New Hope, to make hay while the sun shines, particularly since part of the shift will see a move away from low-calorific brown coal to the sort of black coal Australia is good at.
Coal stocks may not be for every investor. For those contrarian enough to be in this sector right now, we think times are good.
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