The scarcity value of the commodity and investable companies in the coking coal space makes it an interesting and under-analysed sector for equity investors. Combined with above-consensus forecasts for commodity prices, our analysis suggests that the outlook is bright. This view appears to be shared by many corporates, with the recent prices paid for high-quality projects in the asset market suggesting very competitive conditions and high expectations for future pricing. This report aims to put this situation into context by providing investors an overview of the sector, its issues and its opportunities.
Coking coal has been an extremely volatile commodity over the past ten years. Demand has been underpinned by steel production growth in Asia, while supply has been hit by shortfalls caused by flooding in Australia. The price decline from 2011-2016 had a severe impact on many coking coal companies, resulting in mine closures, bankruptcies and rationalisation. This has been a positive for coking coal, tightening the market.
Premium coking coal benchmark prices have rebounded significantly from the trough in early 2016. Consensus expects prices to soften; however, we believe that the consensus remains conservative.
The number of companies involved in coking coal is limited and the majors dominate the market. This leaves only a small universe of highlighted junior ‘pure-play producers’ in the coal market with high exposure to coking coal.
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