Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Whatever happened to the rising price of coal?

The sooty stuff was one of 2016's best-performing commodities. At Newcastle port, the biggest export harbor for the thermal coal used in power stations, traders bid up the price of benchmark grades by 87 percent over the course of the year.

The Other Black Gold
The price of thermal coal at Australia's Newcastle port spiked last year
Source: Bloomberg

The same estimation doesn't appear to apply to the companies that mine it, who tend to take more of a long-term view. Rio Tinto Group's sale of its last mines supplying Newcastle to Yanzhou Coal Mining Co.'s Australian affiliate may come with a showy $2.45 billion price tag, but make no mistake -- these assets are going cheap.

The three mines being offloaded are vast operations, and the number is best understood in the context of that scale. Rio Tinto's share of production, not including minority shareholders, came to a little over 17 million metric tons last year.

That allows you to do a very rough-and-ready comparison to the valuation put on Bengalla, a nearby pit in which Rio Tinto had a 40 percent stake accounting for 2.6 million tons a year before selling out for $617 million nine months ago.

If Bengalla was able to keep producing at its most-recent full-year rate for 10 years, its buyer New Hope Corp. paid about $23 for each ton it's likely to produce. Tuesday's deal, by contrast, comes in at less than $15.

Both parties get something they want out of the transaction. Rio Tinto, which has been quietly sidling away from thermal coal for several years, is finally clear of it. Henceforward, the only tonnage it will sell will be by-product from its Kestrel and Hail Creek pits, which are focused on producing the more profitable coking coal variant used in steelmaking.

On the Slide
Rio Tinto's production of lower-value thermal and semi-soft coal has been declining for four years
Source: Company reports
Note: Semi-soft coal can be sold as either low-grade coking or high-grade thermal coal.

Yanzhou Coal gets something worthwhile, too. The state-owned Chinese miner has been under pressure from Beijing to increase production from its domestic pits for most of the year but has struggled, creating a supply shortfall that's been the main driver behind those surging Newcastle prices in the past 12 months.

Adding Rio Tinto's production is a much easier way of moving the needle. That 17 million tons should be enough to increase Yanzhou Coal's total output by about a quarter over its 2015 production volumes, and at this price, it'll probably be profitable growth, as well. If you can't beat 'em -- buy 'em.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. These are back-of-the-envelope numbers, and deserve a couple of caveats. For one thing, they take no account of the different cost structures of the mines, so are best understood as a measure of potential earnings, not future coal prices. They also assume that the mines will be able to keep producing at current rates for another 10 years, but there seems little doubt that there's enough mineral resource in the ground in the most recent deal. The three pits have more than three billion tons of the stuff, according to Rio Tinto's last annual report and an updated resource estimate released Tuesday.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net