Bowen Coking Coal looks to capitalise on Queensland portfolio and leverage growing demand for steel

Bowen Coking Coal ASX BCB India steel demand
Demand for steel is forecast to experience significant growth over the coming decade thanks to China and India.

Coal is making a comeback and helping several Australian companies rediscover projects thought uneconomic just a few years ago.

Since 2013, coking coal prices have made a resurgent recovery from around US$100 per tonne in September 2013 to around US$220 today. The strong recovery in almost all commodities over the past 5 years has also included other key Australian staples such as iron ore, zinc, gold and aluminium.

It’s also worth bearing in mind that as with most commodities in Australia, 98% of all coking coal produced within its shores is exported overseas.

Coking coal price chart Australia
Monthly coking coal spot prices in Australia.

Several Queensland-based coking coal projects have essentially been revalued due to the improvement in coking coal prices.

Coal junior Bowen Coking Coal (ASX: BCB) is a good example of a company that is looking to re-establish coal production just as the resource business cycle wheels around for its next revolution and improves operating conditions for coking coal companies.

The company recently launched an aggressive two-year exploration and development program, commencing with the maiden drill program at its flagship Cooroorah project.

Bowen currently owns the Comet Ridge, Cooroorah and Hillalong coking coal projects, with a further two joint-ventures also in its project pipeline – all located in the Bowen Basin in Queensland, Australia.

The Bowen basin is a region that’s been synonymous with high-grade coal production for decades, and it’s also a place from which its namesake (Bowen the company) is looking to capitalise on resurgent demand coming from steelmakers and industrial consumers based in India and China.

As it stands the Bowen basin is by far the world’s largest metallurgical coal producing region and Bowen Coking Coal may have the credentials (and the appropriate company name) to make it count.

On the march to coking coal commerce

Bowen has signalled its intentions to commercialise its coking coal portfolio rather clearly. Its latest portfolio addition occurred just last week with the coal junior announcing the acquisition of the Hillalong East project from Rio Tinto.

Meanwhile, over at its most advanced project Cooroorah, Bowen recently boosted its resource estimate by 23% up to 154 million tonnes of coal. Most important, however, was the delineation of around 37 million tonnes of high-quality metallurgical coal which has spurred calls for a pre-feasibility study to be completed at Cooroorah as soon as possible.

To-date, Bowen has built up a global resource inventory in the Bowen Basin to the tune of 190 million tonnes of coking coal, with Cooroorah contributing the majority of the resource base.

And if Bowen’s recent corporate activity is anything to go by, its chances of monetising its strong coal endowment in Queensland seem rather encouraging.

This week Bowen’s non-executive director Steve Formica acquired just over A$47k worth of stock on the market

Are coking coal’s glory days coming back?

Estimated global coal production in 2016 was nearly 7,300Mt, of which about 85% was thermal, but the metallurgical variety is considered far more valuable and far more important to global industry given it use in steelmaking.

Much of the credit for higher resources prices can be put down to the two strongest engines for industrial growth anywhere in the world: China and India.

On the back of a rapid industrialisation phase backed by its mammoth 1 billion+ population that’s not only growing, but becoming richer in the process with growing disposable incomes and a growing taste of goods including cars and modern luxury goods.

India has now become the world’s largest importer of metallurgical coal surpassing even China and the US.

It is also the largest consumer of Australia’s particular brand of high-quality metallurgical coal and is expected to remain so over the coming years.

According to industry analysts, India’s metallurgical coal imports are increasing by around 3.5% per quarter from Australia alone.

The Indian Government projects that its steel production will grow to 300Mt by 2030, which would be a CAGR of 8.7%, consistent with its history.

While coal demand in OECD nations is projected to fall, the IEA shows that coal demand in Asia is expected to rise, and there are two main culprits for the avaricious demand.

Forecast global coal demand 2020 map
Forecast global coal demand 2014-2020 according to the IEA.

Demand for metallurgical coal is driven by metal production, with about 98% of metallurgical coal consumption used to produce steel.

Much like with coking coal, steel production is also being dominated by India and China which has led rise to the notion of “Chindia” dominating the industrial world over the coming decade, just like it has dominated column inches since the turn of the century.

Since 2000, China and India have ramped up their steel production by quite some margin (from 800Mt to 1,600Mt) while the rest of the world has flatlined at around 600Mt, similar to 1980’s levels.

As a side point, this closely reflects the comparative GDP growth figures amongst the elite global nations which have been blitzed by India and China since 2000.

While China’s steel production has been fairly flat since 2013, India’s steel production has risen by more than 20Mt over that time, accounting for half of the global increase, from 1,650Mt in 2015 to 1,691Mt in 2017.

While most of the world remains flat in how much coal it imports and how much steel it manufactures, China and India have been left to compete against each other while racing off into the distance.

Their seemingly insatiable appetite for natural resources including steel has created a superb opportunity for Australian exporters and has forced the Australian coal industry to adapt to producing metallurgical (coking) coal rather than the thermal variety that has become uneconomic and inefficient from a range of perspectives including environmental.

Chart Australia’s metallurgical coking coal export volumes values
Australia’s metallurgical coal export volumes and values.

According to the Resources and Energy Quarterly published last year, the next few years will see Australia’s metallurgical coal production (and export volumes) growing by around 2% annually and rising above 200 million tonnes per year with production coming online from two Queensland-based projects (Byerwen and Eagle Downs).

The encouraging news is that this production is being aimed at countries where demand continues to outpace the rate of import supply, with several small juniors such as Bowen Coking Coal potentially in the slipstream for strong margins in the years to come.

Filip has written in both Australia and abroad during his career, covering everything from the global economy, politics and geopolitical issues to commodities and small cap stocks on the ASX.