This year has been a pretty good one for miners. The Bloomberg Commodity Index, whose broad-based nature tends to soften the most dramatic price changes, rose 5.4 percent over the first eight months, the sharpest increase since 2009.
One material stands out as the biggest winner -- and it's not zinc, whose 47 percent jump looks paltry by comparison.
Coking coal -- a high-quality variant that's turned into coke, which in turn provides energy and carbon in steelmaking blast furnaces -- has notched an 81 percent gain over the period, leaving most other commodities in the dust.
It's worth remembering that coking coal is a very different commodity to the thermal coal used in power stations. Whereas thermal coal is abundant around the world, the metallurgical variety is found in only a handful of countries -- Australia alone accounts for about half of global exports, with the U.S. and Canada combined comprising another third.
It also has less to fear from efforts to tackle climate change. Steelmaking accounts for about 15 percent of global coal consumption, so there's much more to be gained, emissions-wise, from retiring coal-fired power stations than decommissioning blast furnaces.
Coal-fired power is also under direct assault from the plummeting cost of electricity from renewables and gas. Alternative steelmaking technologies are unlikely to be as competitive for another decade or so and in the meantime, China's planned cuts to steel production keep not happening so demand looks anomalously healthy.
Weather is another bullish factor. The variable El Nino climate pattern brings dry conditions to eastern Australia every few years, making it relatively easy for coking-coal mines in the northeast to ramp up supply and drive down prices. Right now, the climate is flirting with La Nina, the opposite condition. The last major La Nina in 2011 caused flooding, which pushed quarterly coking coal contract prices above $300 a metric ton, compared with $92 a ton at present.
So much for the good news. The risk around coking coal is that commodity-price spikes like these rarely last long. One reason is that such moves are similar to the short squeezes seen in equity markets, the result of players bidding up prices to cover immediate positions rather than a more sustainable shift in demand.
Another, as Morgan Stanley analyst Tom Price argued in a note to clients last week, is that most coking-coal producers are selling their product on quarterly contracts for about 65 percent less than what they'd get on the spot market. The natural response to that is to increase production in the hope of selling some spot tonnage, which will have the effect of driving prices back down again.
There's about 39 million tons a year of idled production out there that could be reactivated pretty quickly, according to Price -- equivalent to about 14 percent of the total seaborne coking coal market.
Where activity will really need to pick up before coking coal is back in business, though, is bankers' and lawyers' offices. Although mines that produced more than 50 million metric tons last year are available for sale as companies like Anglo American and Rio Tinto dial back their exposure to the commodity, there have been precious few actual deals, and the ones that have gone through have often fetched peppercorn prices.
Vale's Isaac Plains mine was given an equity value of $1 when it changed hands last year, while Foxleigh, an Anglo American pit that mined about 2.6 million tons of a pulverized variant of coking coal last year, was sold for A$44 million ($33.5 million) in cash plus bank guarantees. That's equivalent to less than seven weeks' revenue at current prices.
That reluctance to deal among the companies that know this market best should temper some of the effervescence we've seen around coke of late. It's still probably a better investment than thermal coal, but that's a low bar to clear. Once the current fizz in the market has dissipated, investors who bet on a sustainable rebound could be left with a glass that's half-empty.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
That $92 contract price is well below the current $152.20/ton for premium hard coking coal on the spot market, since it's set quarterly and can't respond quickly to the current spike in spot prices, which began only in July.
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