In the past week, disruptions at two significant coal mines have fuelled concerns about a shortage of supply just as demand for the commodity surges, triggering a rally in ASX-listed mining stocks.
Underground fires at Anglo-American’s Grosvenor mine in Queensland and Allegheny Metallurgical’s Longview mine in West Virginia have halted production at both sites. Together, these mines contribute about 2.5% to the global hard coking coal export market.
These incidents are expected to tighten the physical coal market sooner than anticipated. The news led to a sharp increase in Australian coking coal futures, which spiked by up to 12% to $US261 per tonne earlier in the week before settling at approximately $US245.50 per tonne on Friday.
The jump in coal prices has rejuvenated coal stocks, which have been largely ignored by investors shifting towards greener investments. Whitehaven Coal and Yancoal saw their shares rise by 16.7% and 9.7% respectively this week, both reaching new 52-week highs on Thursday. Coronado Global Resources surged by 12.6%, and Stanmore Resources climbed 10.2%.
“Recent underground fires have further dented supply and may accelerate market tightening,” said Morgan Stanley analyst Sara Chan. “We see a short-term opportunity in coking (or met) coal, especially after the recent share price pullback.”
Morgan Stanley, which recently elevated metallurgical coal to its top commodity pick, predicts that prices will rise another 15% by the end of the year to $US290 per tonne. This projection is based on an anticipated rebound in Indian demand following a slow period in industrial activity due to elections, which led to increased port inventories.
Although Indian Prime Minister Narendra Modi’s narrow victory initially raised concerns about the potential delay in infrastructure projects, Morgan Stanley believes these fears are exaggerated. “Our global economists see continued momentum in infrastructure and manufacturing, with major rail corridors at the heart of India’s economic revival,” Ms. Chan explained.
Morgan Stanley also highlighted that the market is underestimating supply constraints in China, where stringent safety controls and limited capacity for new mines are impacting production. Meanwhile, Australian exports, the largest globally, have been declining annually since 2019 due to reduced investment in coal.
Analysts had expected a rebound in Australian coal supply this year, driven by typically milder El Niño weather patterns and the ramp-up of several mines. However, exports have fallen 2.2% year-to-date, falling short of projections due to adverse weather, rail maintenance, and downgrades in production guidance from miners.
Morgan Stanley believes Yancoal and Whitehaven are well-positioned to benefit from a sustained rally in coking coal prices, along with Teck Resources before it sells its met coal assets to Glencore. The brokerage has given an “overweight” rating to all three stocks.
The resurgence in coal shares has been a welcome development for Glenmore Asset Management, which increased its holdings in Whitehaven, New Hope, and Stanmore Resources during a market dip in March. Glenmore’s portfolio manager, Robert Gregory, observed that coal stocks have been overlooked due to the strong performance of technology companies.
“The attractive part about these coal stocks is that even at lower points in the price cycle, they generate substantial profits and pay dividends,” Mr. Gregory said. “So the set-up is very positive. When coal prices recover, which I believe is inevitable, these stocks are poised for significant earnings and potential re-rating.”
Despite the recent price recovery, coking coal prices remain well below the record highs of over $US600 per tonne seen in 2022.
