Rio Tinto's Coal Mining Canary Just Stopped Tweeting
(Bloomberg Gadfly) -- From a certain perspective, coal appears to be enjoying a renaissance.
Prices at Australia's Newcastle port, the largest export harbor for the thermal coal used in power generation, have held above $90 a metric ton for eight months, the best run since the market peaked between 2010 and 2012, only dropping below that level this week.
Glencore Plc's energy business -- essentially a coal-mining operation with a droplet of oil thrown in -- generated as much profit in 2017 as in the previous three years put together, and accounted for a quarter of group earnings. This month is one of the dozen best for coal deal-making activity since the start of 2006, data compiled by Bloomberg show.
That could make Rio Tinto Group's decision to exit the last of its coal mines seem quixotic at best. While the sales of its Kestrel and Hail Creek mines and Valeria and Winchester South projects will generate about $4.15 billion (enough on paper to leave Rio debt-free), they'll make it an increasingly iron ore-dependent business.
Skeptics should reflect, though, that miners invest for decades rather than years at a time. Viewed through that lens, the current strength of the coal market looks more like a selling opportunity than a portent.
For one thing, the diversification benefits touted by Goldman Sachs Group Inc. are somewhat limited. All the mines that Rio Tinto is selling produce coking coal, a high-value variant used in steelmaking. As Gadfly has argued before, coke's specialized use probably guarantees it a more promising future than thermal coal -- but it's hardly an insurance policy against a downturn in iron ore.
For another, a look at the diversified miners that have stuck with the thermal variant suggests most are at best agnostic on its future.
BHP Billiton Ltd. has one of the world's largest thermal coal reserves in its Mount Arthur mine north of Sydney, but is mostly holding on to it to exploit a tax write-off. It retains a stake in Colombia's Cerrejon mine largely because that pit's three-way ownership structure makes an exit fiendishly difficult -- and even that enormous reserve will be tapped out by around 2035.
Anglo American Plc, another partner in Cerrejon, has shelved a dramatic plan to sell its coal assets hatched in the teeth of the commodities bust of late 2015. But at the same time, it's quietly abandoning its domestic South African business, and isn't planning any real expansion of its thermal coal output in the foreseeable future:
That leaves Glencore, which spent $1.7 billion on Rio Tinto's Hail Creek mine and Valeria projects last week and about $1.5 billion on a stake in some Hunter Valley coal mines alongside Yancoal Australia Ltd. in 2017. More than any company, Glencore has seen the current climate as an opportunity to double down on the black stuff, but even it is getting picky.
The stakes Glencore has picked up have either been ones like Rio Tinto's Hunter Valley Operations -- a thermal coal pit whose quality and size exceeds most of its own deposits -- or coking coal mines like Hail Creek. Anglo American's South African thermal coal mines, whose 550 million-odd tons of reserves mostly have lower calorific value, were left on the table.
That looks a lot like the behavior of a miner that recognizes that coal's future is dimming, but hopes to make money producing the highest-quality grades as slumping demand knocks out lower-quality pits. Unless miners start chasing those, the International Energy Agency's forecast that coal demand has more or less peaked looks secure.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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.
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