Booming coal shrugs off China ban and renewable energy shift to hit three-year high

Energy transition and the rise of renewables topped investment topics this week thanks to a controversial report from the International Energy Agency, but it was coal which delivered the biggest price rise.
28th May 2021
Tim Treadgold

It isn’t supposed to be like that because coal has become the energy source that no-one talks about for fear of being sent to the naughty corner -- or cancelled.

But the return of thermal coal as a star performer with this week’s 10% rise to $US106 a tonne coal has demonstrated that it remains a remarkably popular, if not indispensable, commodity for now.

That will change, but in the latest coal price, which is a three-year high and more than double the $US52/t of just nine months ago, can be found several important lessons for investors and governments.

Firstly, that the era of renewable energy as seen by the IEA, which recommends banning new oil and coal projects, is a long way into the future and while that’s the road we will travel, many of today’s investors will be dead long before we arrive.

The second lesson is one that China is learning and that’s the pain which comes from shooting yourself in the foot, which is what’s happened with its ban on Australian coal only to discover that local mines can’t keep up with demand and power shortages are emerging in a country with a booming economy. Oops!

For Australian investors who stuck with coal stocks, the reward this week has been significant, with leading producers delivering higher share prices such as Whitehaven’s 10% rise to $1.52, which takes its increase over the past two weeks to 34c, or 29%.

Messing with markets, which is what China is trying to do, rarely has a good outcome and that seems to be the case as the impact of Beijing’s crackdown on commodities starts to fade and prices stabilise or resume their upward trend.

Citi, an investment bank, reckons that the Chinese attack on commodity prices which rattled the iron ore and copper markets is a “buy the dip” opportunity rather than the end of the game, which has been driving the Australian stock market for the past 12-months.

“We believe Beijing’s policy change is to curb the pace of price increases to give downstream sectors some breathing time, but not to kill the rally entirely,” Citi said of commodity markets during the week.

Iron ore, which is China’s prime target for price dampening, came back to earth after its mad dash to an all-time high of $US227/t, though at its latest price of $US182/t it remains significantly elevated and enormously profitable for all producers, not to forget that it is still 150% higher than at this time last year.

Credit Suisse is the latest bank to have a view on iron ore, tipping a price soon of around $US160/t, but perhaps more importantly the bank joins the dots which connect iron ore to its only end product, steel.

“Ultimately, steel prices will control iron ore,” Credit Suisse said. “If steel demand growth slows in the second half of the year, as we expect, iron ore should ease.”

Fortescue Metals, the local iron ore leader, continued to lose ground this week with a fall of 62c to $21.90, a price which is either 15% below the stock’s peak in January or 61% higher than it was at this time last year – glass half empty v glass half full?

Champion Iron, the Aussie working in Canada, slipped 12c to $6.81 but has had a terrific year with a 160% rise over the past 12-months. It also provided a glimpse of the super-strong earnings other iron ore miners will report in August when it announced a 350% profit increase for its financial year to March 31 with a profit of $US785 million.

Gold, which is performing a useful role as a measure of the uncertainty flowing through all markets as interest rates and inflation rise from the grave, rushed up early in the week to a five-month high of $US1910 an ounce before fading to $UD1896/oz to still be $US16/oz ahead on the price a week ago.

At this stage of financial market uncertainty, with multiple unknowns in play, watching gold should become a daily habit of all investors because it is a single measure of the fear and greed which drive every market.

Local gold stocks had a good week including Norther Star which added 30c to $11.54 as well as adding a new chairman in leading WA businessman, Michael Chaney.

As another sign of gold maturing into a genuine long-term investment option, Northern Star also unveiled a dividend reinvestment option for shareholders.

De Grey, a closely followed gold player, added 6c to $1.60 after reporting a fresh set of encouraging assays from drilling at its Hemi project near Port Hedland in WA and said it was on schedule to release a maiden resource estimate in the next few weeks.

Whether gold can hang around the $US1900/oz mark for much longer is a critical question for gold bugs with some banks suggesting not. Morgan Stanley, for example, said this week that gold was enjoying a “reprieve” from macro headwinds which will blow up later in the year.

“Investors have been drawn back into the gold market by high inflation expectations and a shift in sentiments towards U.S. central bank policy as well as volatility in cryptocurrencies and equity markets which is driving safe haven demand,” Morgan Stanley said.

The bank sees gold continuing to be well supported but with a sell-off similar to that seen in 2013 once “tapering” begins in 2022.

Morgan Stanley did not go further with its 2013 reminder, but some investors might remember that gold fell from $US1657/oz at the end of 2012 all the way to $US1049/oz in late 2015 before the latest up-cycle kicked in.

When, rather than if, the interest rate up-cycle becomes a major issue is the most important question in financial markets today but as a guide it’s easy to see the bottom of the cycle with tell-tale signs of higher rates to be found everywhere, including the rapid decline of negative rates in Europe.

Battery metal stocks, as would have been expected, did well after the IEA gave coal and oil the kiss of death. Lithium favourite Pilbara Minerals led the way with a rise over the week of 11c to $1.19. Galaxy put on 19c to $3.75. Vulcan was 79c stronger at $7.35 while Liontown managed a rise of 1c to 45c.

Other share-price moves, and news of interest included:

  • Lefroy Exploration leading the way among gold explorers with a rise of 23c to $1.20 after reporting depth continuity to the original Burns discovery hole close to Kalgoorlie in WA. Investor interest was further fuelled by stockbroker comments that Lefroy could become the next Chalice Mining, which rocketed after its Julimar palladium discovery.
  • Element 25 added 18c to $2.41 after reporting that it had reached a port access agreement to ship manganese from its Butcherbird project in the north of WA through the Utah Point facility in Port Hedland.
  • Ora Banda fell 3c to 10c after reporting ore processing difficulties at its Davyhurst mine in WA but maintained annual guidance of 82,000oz of gold for next year.
  • Dacian Gold lost 5c to 29c after reporting successful completion of a $40 million equity raising to expand operations. Other capital raisings include $6.75 million for Latitude Consolidated. $10 million for Navarre Minerals, and $3.2 million for Trigg Mining.
  • Emmerson Resources reported high-grade, near-surface gold intersections from the latest drilling at its Tennant Creek project in the Northern Territory with best hits of 8 metres at 15 grams a tonne from 16m, and 15m at 6.77g/t from 4m. On the market, Emmerson crept half-a-cent higher to 7.8c.
  • Salt Lake Potash added 2c to 38c as it finalises funding for its Lake Way potash project with what Macquarie Bank called an “unexpected” $28 million capital raising while maintaining a price forecast for the stock of 65c.
  • Anglo Australian Resources reported a maiden 500,000oz gold resource at its Mandilla project near Kalgoorlie. On the market, the stock added half-a-cent to 9.8c.
  • Australian Bauxite got a 2c lift to 13c after reporting encouraging rare earth assays in its northern Tasmanian bauxite project, with a potential source rock identified, and
  • Kin Mining added 1c to 13c after reporting high-grade gold assays from air core drilling at its Mt Flora project in WA with a best hit of 22m at 8.96g/t from 24m.

Image: Dave Hunt/AAP

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