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What does coal’s lesson mean for other commodities?

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By Tim Treadgold - 
Coal oversold price commodities metals copper nickel aluminium zinc

US investment bank Jefferies says the same forces driving coal can be seen in metals such as copper, nickel, aluminium and zinc.


Investors can learn a lot from coal even if they find it an ethically unacceptable asset with coal’s soaring price a guide to what might happen to other, cleaner, commodities suffering from a lack of new development.

The first coal lesson calls for a brief trip back in time to last November when Small Caps published an article questioning whether Australian coal mining companies were oversold at the time.

Yes, they were cheap (oversold) late last year, a time when the price of thermal (electricity producing) coal was trading at what looked to be an over-inflated US$156 a tonne, which was double the price of a year earlier.

Anyone prepared to overlook coal’s reputation as a primary cause of environmental pollution has been richly rewarded if they had invested in local coal miners when Small Caps posed the oversold question.

Since then, Whitehaven (ASX: WHC) has risen by 250% from $2.35 to $8.45. New Hope Corporation (ASX: NHC) is up 190% from $1.96 to $5.73, and Stanmore (ASX: SMR) is up 108% from $0.98 to $2.04.

Is coal oversold again?

With coal currently trading at US$440/t it’s interesting to ask the oversold question again with the correct answer this time being probably, if only because of the speed at which the price has risen and the potential for a global recession next year, which will dampen demand for everything.

But it would also be unwise to write coal off as a big profit generator, because the price could remain elevated for several years as the western world tries to live without Russian fuel and renewables such as wind and solar struggle to plug the energy hole.

War in Ukraine has been a coal-price driver and the latest energy incident, three mystery gas pipeline explosions under the Baltic Sea, points to an ongoing energy crisis in Europe which is shoring up the global coal price.

Price trend predictions

One top commodity research consultancy, Wood Mackenzie, reckons the high European coal price is “a short-term trend” with renewables becoming even more attractive as a source of reliable electricity supply.

Jefferies, a US-based investment bank, has a slightly different view and believes coal will eventually fade but in the meantime it’s a case of the price potentially being “stronger-for-longer” because of a developing supply squeeze caused by a capital investment drought.

Rather than fall anytime soon it is possible to see the coal price surging even higher in the northern winter, Jefferies predicts.

Whatever happens with coal, the underinvestment issue is one that applies to other commodities being buffeted by the same forces of strict environment, social and governance (ESG) regulations, and tight financial and banking conditions, which makes it hard to raise development capital.

“The coal mining industry continues to practice austerity despite the strength in prices and an emerging view in financial markets that coal demand may not face an imminent secular decline,” Jefferies said in its report.

“We wouldn’t expect this capital discipline to change even if prices rally once again this winter.”

Coal boom drivers

The global coal shortage is a direct result of strong demand and underinvestment in mine supply, along with three other supply limiting issues, the bank said.

“Government initiatives, ESG restrictions, and financing challenges have caused large, diversified miners to divest coal assets, and coal-focused miners to reduce their workforce and cut capex,” Jefferies said.

“Increasing demand related to the Ukraine war, weather and overall uncertainty in energy/commodity markets has led to coal price spikes over the past year.”

“Despite Chinese coal production significantly increasing in the first half of the year, challenges across the entire supply chain limit the amount of coal that can be mined and transported to end-markets.”

Wider commodity sector

So much for coal which is being driven up by a combination of strong demand and limited supply. What about other commodities?

This is when the Jefferies analysis gets really interesting, because it says coal’s boom could be a dummy run for the wider commodity sector, with issues such as government regulation, financing limits and ESG rules having a much wider influence than is currently recognised.

A lack of “expansionary capex” is consistent with a permanent decline in coal consumption and elevated pricing, which has not led “to a pivot to growth from the mines which is very different to past cycles”.

“In our view, this is partly an unintended consequence of the relentless push for the world to go green,” Jefferies said.

“We expect similar dynamics, but to a lesser extreme to play out in the base metal markets in the years ahead.”

Jefferies doesn’t go as far as to say that the lesson of coal’s price boom, and the potential for it to be “stronger-for-longer” can be directly applied to other commodities, but the bank does say that the same forces driving coal can be seen in metals such as copper, nickel, aluminium and zinc.

In fact, a wise investor should be able to see that ESG, government regulation and a tighter banking environment are universal price boosters for all resources.