With Cyclone Debbie having just tried to emulate Cyclone Yasi, coal pricing and what ASX companies mine has suddenly become very much more relevant.
Preliminary statements coming from the Queensland coal fields are that there has been not less than 30% of anthracite coal production shut in for an extended time frame, whatever that means. Exact details from the region are not being released by companies such as BHP and Queensland Rail, but you cannot have a major cyclone, the most damaging in 40 years with a 1300 kilometre zone of influence and not have big issues for coal mines right in the middle. Production from coal mines in the region was in 2015/16 123 million tonnes of coking coal and 39 million tonnes of thermal coal. Obviously this flooding has to impact the unfortunate companies mining in the Collinsville, Bowen, Mackay regions negatively and for companies mining similar coals in say NSW very positively. Force majeure is going to be claimed over flooded open pits, railways and their tracks that cannot support the heavy trains and the ports like Mackay and Gladstone that load the coals for export. But where are the ASX announcements?
So what is coal?
There is no concept of homogeneity in coals.
At one end of the spectrum you have a cheap product that is conveniently called lignite coal, because it is black or brown looks like coal, and most importantly, burns.
At the other end is a hard black solid bituminously looking rock that burns with a very high efficiency and generates very particular burning characteristics that are seriously important in the steel making industry.
So coals ain’t coals.
When a power station, cement works or steel refiner seeks to buy their coals they are most concerned with particular characteristics, being swelling (under heat), volatiles (being the real content that burns including methane gas enclosed within the coal), moisture, fractionation features such as dust/ash like components that clog their extraction facilities and impurities such as sands, shales and other minerals such as sulphur and radio-active materials.
Every one of those characteristics is either a positive (increased price feature) or a negative (such as monazite being a problem in the burning process that can escape into the atmosphere and itself is radio-active). Sulphur when burnt with the coal enters the atmosphere and when combined with moisture can generate sulphuric acids that have been blamed for major environmental damage in North-Eastern USA and Canada as acid rain.
Obviously what suits one smelter or power station does not always suit the next potential buyer, so the coal miner tries to “wash” out problem-some contents and recover these as wastes before the balance is on sold to the buyers.
One of the new jargon political furfies is the expression ‘clean coal’. There is no such product as a clean coal sold to a buyer; it is cleaner and has less problem-some elements than other coal products available on the markets. While a lot of work has gone into producing cleaner coals that work better in specific furnaces, to achieve a higher price in particular markets a great deal more work in selecting the more appropriate coals, then washing and scrubbing that coal will be needed before the words meet the description.
The cheapest coal is commonly a brown coal called lignite. It is closest in nature to peat which is hand extracted from bogs in Scotland and Ireland. Brown coal is without doubt, as a generalisation, the lowest generator of heat (60% to 65% carbon) and is the dirtiest and most polluting coal when burnt, i.e. in context of what goes up the furnace stack and needs electrostatic and other measures, such as scrubbing to reduce the impact on the environment (surrounding the areas of the furnaces).
The next style of coal would commonly be referred to as soft coking coal and sometimes bituminous coal. This is a softer form of black coal (say approximately 70% carbon with moisture of around 15% and ash of around 20%) that is considerably cheaper than hard coking coal (anthracite) and is more used in cheaper types of furnaces, potentially as a fluidised bed and possibly as an adjunct blend to higher quality coals. The blend as a total feed is cheapened down by the addition of these coals.
At the highest end of the spectrum are the hard coking coals, with very low sulphur contents and very high burning ratios rated in BTUs (British Thermal Units). The ultra high grades from say the Bowen Basin have carbon contents of around 85%, ash of around 12% and moisture of around 13% when not drowned by cyclonic events.
The Mines
Having been down a few collieries over my time as a consultant, it would be more than reasonable to indicate that anyone working down there as a permanent job deserves the level of wages they are achieving. These wages levels and gas exposures have driven many underground mines to close, hence we see so many open pit mines that are enormous and deep. The problems being flooding, environmental scarring and the escape of methane and other gases into the atmosphere at the time the coal is broken from the coal face.
Traditionally in Australia, the largest ASX listed miners of coals (for export) have been BHP and Rio Tinto. They mine a range of coals in NSW and Queensland and commonly blend them before sale to achieve the buyers end specifications on the key characteristics mentioned.
There are other mines and miners and much of what they produce is for electricity generation or cement manufacture. There has been a concentration of foreign owner operators in the Australian coal scene and this is being exaggerated by groups like Adani.
On the ASX, the other major miner would be Whitehaven Coal Ltd (WHC) (NSW producer) and readers would recognise how strongly the price of Whitehaven shares has reacted to major improvements in coal prices over the last 12 to 18 months. There are others, such as Baralaba Coal Ltd (BCL), formally Cockatoo Coal, and Stanmore Coal Ltd (SMR) to name two, without being comprehensive.
The financial press has been awash with articles covering the mine closures and the sale of large portfolios of mines, potentially driven by a longer-term perspective of wanting to be out of potentially polluting energy sources before the green movement damages values.
The Prices
Recognising the differences in coals, even from differing seams from the same coal mine, is important in any assessment of an investment in a coal mining company. The premiums achievable as against the penalties to be suffered will impact on their revenue streams, so each mine and even each seam needs to be properly understood (rather than just some mindless across the board averaging).
Lignites are achieving poor prices and because they are sold to power stations and the like, we should ignore them.
Soft Coking Coals with around 70% to 75% carbon content have been achieving prices in the range of US$75 to US$100 per ton over recent time.
Hard coking coals with around 80% to 90% carbon content have been achieving prices over US$150 to US$200 per tonne.
The real issue is what will Cyclone Debbie do to roll forward coal prices in the short to medium term and how will those companies negatively and those positively impacted react on the ASX? As of today, the companies involved will have the excuse of properly understanding how Cyclone Debbie will impact their operations and those of their infrastructure support suppliers, i.e. no press releases of note. The NSW producers will just be looking at what stocks of coal they have unsold that they will be able to deliver into the spot markets and saying thanks.
Prices of high-grade coking coals spiked to over US$335 per tonne immediately after Cyclone Yasi.
The railway companies will also have real issues with undermining of their tracks and flooded lengths of tracks. So many of their lines may not be passable for weeks and they will not be achieving freight transport.
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