Record coal prices tipped to rise further on Ukraine conflict
Yancoal chief executive David Moult says his Asian customers are scrambling to find alternative supplies to replace Russian coal, and he expects the military conflict in Ukraine will extend the period of extremely high coal prices.
Prices for top quality Australian thermal coal have been above the boom level of $US100 per tonne for the past nine months and price agency GlobalCoal reported a record high of $US256.18 per tonne on Friday.
The price boom was originally driven by supply disruptions in top exporting jurisdictions such as NSW and Indonesia, but has been turbocharged by the Ukraine conflict and the limits it has placed on the export of Russian energy commodities like oil, gas coal.
Prices for those energy commodities traditionally move in lockstep given they can – to some degree – be substituted for each other and Mr Moult said there was no sign of extra coal supply emerging to douse the price rally.
“I would expect energy prices would continue to rise with that sort of conflict underway, the knock-on effect for us is the fact there are countries that would normally buy Russian coal that won’t buy Russian coal at the moment,” he said.
“We are already hearing noises from a couple of our Asian customer bases like Japan and Korea and I think that will do two things, it will increase our market, but it will also underpin the current high price.
“As we came into 2022 we expected the price to drop off a little bit but at the moment it is being maintained.”
Commodity intelligence provider Wood Mackenzie said Europe relied on coal for about 14 per cent of its power and got most of its coal from Russia.
“Having to replace Russian coal volumes would result in a price shock to global coal markets and a coal shortage in Europe. Russian coal accounts for roughly 30 per cent of European metallurgical [coking] coal imports and over 60 per cent of European thermal coal imports,” said Wood Mackenzie in a statement.
“The primary issue with replacing Russian coal exports in Europe is its reliance on Russia’s particular quality of coal.”
Yancoal said 85 per cent of the coal it sold in 2021 was thermal coal used in power generation; the remaining 15 per cent was coking coal used for steel-making.
About 30 per cent of Yancoal’s thermal coal exports were the top quality material – coal with energy content above 6000 kilocalories per kilogram – while the rest sells at lower prices.
Long before the Ukraine conflict drove coal prices to record highs, a coal export embargo in Indonesia, flooding and infrastructure challenges in NSW and pandemic-related labour shortages in Mongolia and China had combined to push thermal coal prices to what were then record highs in September and October.
Yancoal’s revenue surged 56 per cent in 2021 and helped the miner report a $791 million profit.
The higher profit was achieved despite Yancoal’s production volumes slipping 4 per cent last year on the weather and pandemic disruptions that affected its NSW heartland.
But Yancoal had the benefit of being able to draw down stockpiled material, which ensured sales volumes were only 1 per cent lower than the previous year.
Mr Moult has flagged that production costs – excluding government royalties – could be 29 per cent higher in 2022 than they were in 2020 as inflationary pressures like the cost of diesel further bite.
The financial results published by Yancoal this week were hard to reconcile with the previous year’s $1.04 billion loss, given last year’s accounts were affected by two major non-cash items caused by the decision to absorb a wholly owned subsidiary into Yancoal’s accounts.
Most importantly, Yancoal’s net debt fell to $1.94 billion from $3.56 billion over the year, giving the company a gearing ratio of 24 per cent at December 31.
Yancoal has just $25 million of compulsory debt repayments due in 2022, but with strong cashflows ahead it will likely make voluntary repayments such as the $US500 million voluntary payment made in October.
Asked whether he was interested in using those cashflows to buy BHP’s Mt Arthur thermal coal mine in NSW, Mr Moult said, “We are not at the moment looking at it actively”.
The improved debt metrics enabled Yancoal to pay total dividends worth $930 million in the year, albeit they were unfranked. Shareholders received 70.4¢ per share in the period and the surprise dividend triggered a 14 per cent rally in Yancoal shares on Tuesday.
Yancoal’s highly concentrated share register and relatively small free float has prompted most Australian investors to overlook it in favour of coal mining rivals like Whitehaven Coal.
But Mr Moult said there had been improved liquidity in trading of Yancoal shares, from an average of about 15,000 shares per day in 2019 to about 101,000 shares per day in 2021, and he was confident the company was gaining traction with local investors
The record prices for thermal coal have coincided with 197 nations vowing to “phase down” unabated use of coal at last year’s Glasgow climate conference and at a time when leading economies like the US, the UK, Japan and South Korea have announced an acceleration of their decarbonisation plans.
Mr Moult said his view about the future demand for coal had not changed at all over the past year.
“We are in a transition, it would be stupid of me not to acknowledge the world is transitioning, but I think there is a really strong place for us in the next 20 years to be part of that transition to a more carbon constrained economy,” he said.
“Most of our mines have got a mine life of less than 20 years, we have a couple that go past that.
“From a strategy point of view, coal is still important, we are looking at other commodities, and we are looking at repurposing sites on the renewable side as well.”
S&P Global Platts said the top quality hard coking coal exported from Queensland by the likes of BHP was fetching $US457 per tonne on February 28.
Yancoal’s exposure to coking coal is mostly for products that fetch lower prices than the top quality hard stuff; Yancoal produces the “semi-soft” variety and the type of coal used by steel mills in the “pulverised coal injection” (PCI) method.
S&P Global Platts said prices for Australian PCI coal had rallied since it became clear that Russian supply would be affected by the military conflict in Ukraine, and was fetching $US370 per tonne on February 28.