Who could have imagined that coal, traditionally regarded as the "least favored" source of energy, could experience a continuous surge in prices?

Recently, the benchmark coal price in Asia, the largest consumer region of coal—the Newcastle coal futures price—once soared to a historical high of over $430 per ton, with an increase of more than 150% since the beginning of this year.

As a country known for its mining industry, Australia is the world's fifth-largest coal producer and the second-largest exporter, with 80% of its thermal coal used for export. In May of this year, the value of coal exports increased by 20.4%, a staggering 299% increase compared to the same period last year. A senior economist at the Commonwealth Bank stated that the coal export value in May was higher than the export value of iron ore for the first time since April 2009.

The skyrocketing coal prices have led to a record trade surplus of 16 billion Australian dollars for Australia in May. According to data from the Australian Bureau of Statistics, the trade surplus increased by 20% compared to the previous month, far exceeding market expectations of 10.8 billion Australian dollars.

It is noteworthy that the booming coal market has quickly been transmitted to the capital market, with several coal companies listed on the Australian Securities Exchange (ASX) transforming into "coal super frenzies."

Advertisement

As of the close on July 26th, the Australian domestic coal merchant Whitehaven Coal (ASX: WHC) and the Chinese state-owned coal giant Yancoal (ASX: YAL) have seen increases of 147.15% and 122.22% respectively since the beginning of the year.

Why has the "dirtiest" fossil fuel—coal—made a comeback? Why have coal prices repeatedly hit new highs? Will they continue to rise in the future? How long can the Australian "coal super frenzies," whose stock prices have doubled within the year, continue to "frenzy"?

China-Australia Foreign Ministers' Meeting, a boon for coal?

On July 8th of this year, the foreign ministers of China and Australia met in Bali during the G20 Foreign Ministers' Meeting. This was the first bilateral meeting between the two countries' foreign ministers in nearly three years. The Australian foreign minister's statement after the meeting indicated that Australia has taken an "important first step" in stabilizing its relationship with China.On July 14th, Bloomberg reported that China is considering lifting the unofficial trade ban on Australian coal imports that has been in place for nearly two years. The easing of tensions between China and Australia, along with concerns over potential energy supply disruptions due to conflicts in Eastern Europe, are the main reasons driving China to contemplate this measure. The report also cited sources as saying that China is seeking to diversify its sources of energy supply to avoid a recurrence of last year's power shortages.

New South Wales Newcastle Coal Shipping Port

The report further stated that while it is still uncertain whether the final decision to lift the ban will be made, some companies are already preparing to resume imports of Australian coal. In addition, according to Chinese customs data, China has completed the clearance of over 1 billion Australian dollars worth of backlog Australian coal.

Previously, China, the world's largest consumer of coal, was also a major consumer of Australian coal. In 2021, China's coal consumption reached 86.2 petajoules, accounting for approximately 53.8% of the global total coal consumption, which is four times more than the second-largest consumer, India. If China resumes imports, this would undoubtedly be a significant boost to Australia's short-term coal export demand.

Moreover, amidst the global scramble for resources, in May of this year, the Chinese government made an important decision to waive coal import tariffs (typically above 5% for thermal coal) until March 2023. This measure aims to reduce import barriers and lower the input costs for domestic energy suppliers.

However, this does not mean that China needs to repurchase Australian coal in the short term.

CNBC believes that China's current coal inventory is sufficient. Data from the National Energy Administration of China shows that in the first half of this year, China's raw coal production reached 2.194 billion tons, a year-on-year increase of 11%, maintaining double-digit rapid growth for five consecutive months. At the same time, in the first half of the year, China's cumulative coal imports were 115.001 million tons, a year-on-year decrease of 17.5%.

There are two main reasons for the significant reduction in China's coal imports:

1. The ban on coal exports from Indonesia in January and its ripple effects, resulting in a substantial year-on-year decrease of 45.93% in China's coal imports from January to February.

2. Import price inversion suppressing coal arrivals. From January to May, the average unit price of China's imported coal was $159.59 per ton, a significant year-on-year increase of 110%. Calculated based on Indonesia's 4500K coal type, the price inversion between Chinese and foreign coal is approximately 100 yuan/ton ($14.81/ton).Citing Lin Boqiang, Dean of the China Energy Policy Research Institute at Xiamen University, he stated that the previous import of coal from Australia was not because China lacked coal, but rather due to China's coal distribution pattern of "moving southward and exporting northward." In the past, the cost of importing coal from Australia, including transportation fees, might have been cheaper than transporting coal from the north to the south. However, the current situation is different, with Australian coal prices following the global market and being significantly more expensive than Chinese coal.

It is worth mentioning that after China imposed an unofficial ban on coal imports from Australia, both China and Australia have sought alternative import and export sources.

Therefore, despite signs of thawing relations between the two countries, the COVID-19 lockdown has led to a slowdown in China's economic growth, especially a decrease in coal demand from the steel industry. Moreover, China currently has sufficient coal production and inventory, and the prices of domestic and foreign coal are inverted, which also means that the possibility of China resuming the purchase of Australian coal in the short term is relatively small.

European energy takes a "U-turn," but the trend of coal being replaced remains unchanged.

Before the Eastern European conflict, Europe had reached a general consensus on abandoning financing for fossil fuels and supporting green alternative energy, with coal phase-out targets included in the long-term plans of many countries. However, after the Eastern European conflict, Europe embarked on an energy "U-turn," with coal once again becoming a "hot commodity."

"The Eastern European conflict has led to unexpected consequences," an article on the UK's Sunday Times website once stated. Germany made a sudden sharp turn in environmental policy, ordering coal-fired power plants to be fired up and restarted. For Germany, where "environment" was a major topic in last year's election debates, the return of coal is a "painful moment."

Weisweiler Coal Power Plant in Germany

It's not just Germany; to prepare for a "winter without Russian natural gas," countries such as Italy, Austria, and the Netherlands have also indicated that they will reopen coal-fired power plants. According to Joseph Delatte, a climate, energy, and environment researcher at the Montaigne Institute in Paris, importing liquefied natural gas requires technical and facility support. In the short term, to alleviate the contradiction between energy supply and demand, Europe has no choice but coal.

More importantly, many countries actively seeking alternatives to Russian coal imports have unanimously turned their attention to Australia. Currently, countries such as Germany, Poland, Italy, and Croatia are all seeking more supplies from Australian coal merchants and establishing energy agreements.

At the same time, in March of this year, the benchmark price of high-quality Australian coal set a record of $256 per ton, with the price of thermal coal delivered to Europe jumping by $80 per ton to $285 per ton within a week. The Australian Department of Industry, Science, and Resources estimates that the Eastern European conflict will push Australia's energy export revenue to a record $419 billion in the 2022-23 period.However, it is concerning that the surge in coal demand has driven up greenhouse gas emissions. The Economist reports that emissions from fuel this year will reach a record 15.3 billion tons, accounting for over 40% of the global total.

Nevertheless, the European Commission, in the updated REPowerEU plan (a plan for Europe to be independent of Russian fossil fuels by 2030) in May this year, stated that they would increase coal power generation (+105 terawatt-hours) and decrease natural gas power generation (-240 terawatt-hours) without compromising the EU's climate goals. At the same time, they are massively accelerating the deployment of wind and solar energy, with renewable energy expected to account for 69% of electricity production by 2030, thereby reaching the climate target level.

Therefore, the increase in coal use is merely an emergency measure to address energy shortages. Meanwhile, Europe has not slowed down its efforts to fully achieve "zero emissions." It is expected that the energy tension will gradually ease after mid-2023, at which point the high demand for coal will also subside.

Will coal prices continue to rise in the future?

In addition to the surge in demand, the tight supply chain of Australian coal is also a major catalyst for driving up coal prices.

Due to the prevalence of open-pit mining, the coal production on the east coast has been severely disrupted by heavy rainfall influenced by the La Niña phenomenon this year, flooding some mines and major railway lines, severely hindering coal mining and transportation.

It is worth mentioning that Australian Rail Track Corporation (ARTC) closed the Hunter Valley rail network on July 5th, which connects approximately 40 coal mines to the Port of Newcastle. Its competitor, Pacific National, stated that they have lost about 140 coal transportation services, equivalent to about 1.77 million tons of coal, most of which are export services.

As a result, the coal export price from Newcastle rose by $10 to $16 per ton overnight, reaching $412 per ton, a historical high. According to the latest report from the World Meteorological Organization, the La Niña phenomenon is expected to last at least until August.

It is not just Australia; global seaborne coal supply has tightened due to heavy rainfall and export restrictions imposed by Indonesia, the largest coal exporter this year. The recovery of coal production in the United States is also constrained by factors such as labor shortages, railway facilities, and ports. In addition, Australian coal merchant Whitehaven stated that logistics issues in Russia and South Africa have also impacted the coal market supply.

So, with current coal prices already hitting new highs, will they continue to rise?Based on the analysis above, the high demand for coal due to the European energy crisis, coupled with China's resumption of Australian coal imports, along with the issue of coal supply shortages, the tense supply and demand relationship is unlikely to improve in the short term, and coal prices are expected to remain high in the short term.

However, the sustained high price of coal also encourages more production. As the La Niña phenomenon subsides and Indonesia lifts export restrictions, the pressure on the supply side will gradually be released starting in the second half of the year.

Stock price up 147% within the year! How long can this company's stock price continue to soar?

As of July 27, the ASX200 index has corrected by 8.56% so far this year. However, driven by the energy crisis and the surge in commodity prices, the stock price of Whitehaven Coal (ASX: WHC) has risen by more than 147%, far outperforming the broader market. Especially on the day of the announcement of the fourth quarter results for the fiscal year 2022, the stock price soared nearly 8% in the morning to 6.04 Australian dollars per share, which is also the highest level for the company since July 2011, nearly 11 years ago.

Whitehaven is the leader in Australia's only emerging high-quality coal basin. The company operates several coal mines in the Gunnedah Basin in northwest New South Wales and owns several coal exploration and development projects in Queensland. The company mainly exports to markets in South Asia and North Asia, with thermal coal accounting for 84% of total revenue and coking coal accounting for 16%.

From a fundamental perspective, the company's performance in the fourth quarter of the fiscal year 2022 was strong, mainly due to the following four highlights:

The company expects EBITDA for the fiscal year 2022 to be about 3 billion Australian dollars, compared to only 200 million Australian dollars in the fiscal year 2021, a surge of 14 times year-on-year;

The company's sales profit has increased significantly, mainly due to the record average coal price of 514 Australian dollars per ton in the fourth quarter, far higher than the average of 325 Australian dollars per ton for the fiscal year;

By the end of the fiscal year, the company had no debt, with net cash of 1 billion Australian dollars, and the high coal prices helped the company generate a cash flow of 1.4 billion Australian dollars in the fourth quarter;The company has repurchased 76.37 million shares since the fourth quarter (approximately 7% of the issued capital), with the goal of completing a 10% share repurchase. The substantial buyback not only demonstrates the management's optimism about the company's future development but also indicates that the company has ample cash flow.

In addition, despite the negative impact of extreme weather and labor shortages caused by COVID-19 on coal production and transportation, the company's main coal mining projects, Maules Creek, Narrabri, and Gunnedah, have met their production and sales expectations. It is anticipated that the global energy crisis will continue to drive strong coal demand over the next six months, allowing the company to maintain robust revenue growth in the short term, which also provides some support for the stock price.

However, it should be noted that the company's current price-to-sales ratio is 2.5 times, only slightly lower than the industry average of 3.1 times. Due to the recent significant increase in stock price, it has approached the fair valuation level, and there may be limited room for further short-term growth.

Nevertheless, Morgan Stanley analysts are very optimistic about Whitehaven. Due to the company's strong fundamentals and improvements in some operational issues faced in the past few years, Morgan Stanley has raised the target stock price from AUD 7.75 per share to AUD 8.50 per share. With the closing price on August 1 at AUD 6.34 per share, there is still a potential increase of 34%.

In conclusion: Coal stocks have short-term opportunities and long-term risks.

At present, high coal prices will not be improved in the short term due to the global tense supply and demand relationship. It is expected that coal producers will still be able to achieve considerable revenue growth in the second half of the year relying on high coal prices. Therefore, companies like Whitehaven, which have strong fundamentals and low valuations, are a good choice for short-term investment.

However, it should be noted that coal is known as the "dirtiest" fossil fuel. In today's world where long-term "zero emissions" goals are imperative, traditional energy investments are susceptible to the influence and intervention of national policy directions, and coal will eventually be replaced by renewable energy sources. Therefore, while coal stocks still have profit opportunities in the short term, long-term holding and investment will still face risks.