Coal prices are not supposed to be rising as governments tighten environmental controls but that’s precisely what is happening at the premium end of the coal market where prices have soared.
Over the past six months the price of top quality thermal coal exported from the Australian port of Newcastle has risen by 25% to $115 a ton, a move reflected in the share prices of Australian coal exporters such as Whitehaven Coal which is up 27% over the same time, and Stanmore Coal which is up 16%.
The increase is more dramatic when looking back two years to a time when premium thermal coal exported from Newcastle was selling for $50/t, less than half its current price. Whitehaven’s share price is even more impressive over a two year time frame; up 140%.
Interestingly, the price of lower quality coal has not risen over the past 12-months, stuck at around $65/t.
The net effect of recent events in the coal market is to create a wide gap between the best quality coal, which is also the least polluting, with lower-quality coals that are cheaper but more environmentally damaging.
Flight To Quality
What could be happening is part of a change being seen across the world’s mining industry where there is a flight to quality as environmental regulations tighten around gas emissions and the disposal of waste generated in manufacturing processes. As a general rule high-quality raw materials create less pollution.
But there might be another factor at work in the coal market which is potentially more significant; declining supplies of premium coal as exploration for the fuel slows and government mining approvals become harder to get.
China has been a key player in the high-quality drift which can also be seen in the market for iron ore where limited supplies of top quality material fetch up to $90/t whereas the benchmark price is closer to $70 a ton and low-grade ore has dropped to $40 a ton.
Coal has always had two primary markets, material classified as coking which finds its way into steel-making, and energy (or thermal) coal used to generate electricity.
Steel-making coal has not featured in the latest price moves which is all about demand for electricity in Asia.