Deeply Unloved Coal Has Its Fans
By Tim Treadgold
With the outlook for coal as black as the mineral itself it’s not surprising that there is a glut of coal mines for sale. What is a surprise is that there appears to be an outbreak of competitive tension among potential buyers.
Over the past three years the price of thermal coal, which is used to generate electricity, has fallen by more than 50% from around $140 a ton to recent sales at $63/t, though the price does vary with the quality of the coal.
Metallurgical coal, used to make steel, has been hit harder, dropping by more than 70% from around $300/t to $85/t.
The Problem Is More Than Price
The problem for coal is not a simple story of supply exceeding demand, though that’s the root cause. There are also the problems of toughening government environmental regulations, cheap oil and gas which can displace coal in a number of markets, and the rise of renewable sources of energy, such as solar and wind power.
With so many pressures bearing down on one of the world’s oldest and dirtiest sources of energy it is interesting to discover that a number of potential bidders are circling the unloved coal assets of the world’s biggest diversified mining companies which have grown tired of battling market and government headwinds.
Rio Tinto , BHP Billiton and Anglo American , three companies with an assortment of assets other than coal, are actively seeking buyers for some or all of their coal assets, or have already successfully divested coal mines regarded as surplus to requirements.
BHP Billiton shifted most of its thermal coal assets into a spin-off called South32. Anglo American is seeking buyers for assets, as is Rio Tinto which is reported to be seeking up to $3 billion for its thermal coal mines in Australia.
Hunting For Coal Bargains
With a flood of coal assets hitting the market around the world, and with profits from coal evaporating, it is hard to imagine anyone having an optimistic view of coal, though that’s before considering how two men who have a very deep understanding of coal see the future.
Ivan Glasenberg and Mick Davis built their fortunes on coal, before adding other minerals. Glasenberg is the chief executive of Glencore, one of the world’s biggest coal producers. Davis is the public face of a private equity fund called X2, a name derived from the Xstrata XSRAY +%business acquired in bruising circumstances by Glencore two years ago.
Both Glencore and X2 have reportedly been running a ruler over Rio Tinto’s coal assets though whether a deal will emerge is unknown given the poor price environment.
Vendors Want Bidding Tension
What could be driving a deal, and will be egged on by Rio Tinto, are the egos of Glasenberg and Davis, two men who trace their relationship back to a school friendship in South Africa and, more recently, a bitter bust-up during the Xstrata takeover.
Glasenberg, seemingly, has more to gain because some of Glencore’s Australian mines are alongside the Rio Tinto mines being offered for sale.
Davis, after two years of talking about a deal to deploy the estimated $5 billion of cash committed by investors to the X2 fund, is a long-term believer in coal, but with the Rio Tinto assets he could also enjoy playing the role of an interested bidder, if only to push the final price up for Glasenberg.
Coal Beats Renewables In The Third World
Behind what might be called a coal-world personality clash there are other issues at work, not least being the fact that coal remains the preferred fuel source in many poor countries where renewable energy is prohibitively expensive and oil is reserved for use as a transport fuel.
That point can be detected by examining coal shipments from Australia which are running at record levels, rising by 5% in the 12-months to June 30 to 219.4 million tons.
The high level of exports has undoubtedly helped depress prices, but there is also no doubt that the coal being exported is finding a ready market, perhaps because it is cheap relative to other fuels, but also because it remains the preferred fuel for electricity in fast-growing Asia, as well as in Africa.
It is possible that old coal hands like Glaseneberg and Davis are looking through the current coal glut, and the negative publicity associated with coal in the U.S. and Europe, to see a bright future for a demonized mineral.