Coal stocks rally on Macquarie upgrades

While higher coal prices may well accelerate the move towards alternatives, the coal price renaissance is far from over with Macquarie upgrading its thermal coal outlook on the back of a “willingness to pay a premium to secure energy supply”.

Major increases to the broker’s thermal coal price outlook – with 38-114% upgrades over 2023 to 2027 – are based on both a market deficit and a desire by developed economies to put a foothold on supply.

With demand outpacing supply, Macquarie’s second-half 2022 thermal coal price forecast is up 25% to US$410 per tonne while the 2023 price forecast is US$367.50 per tonne.

What’s driving demand

To put the significance of these prices in context, it’s worth remembering that only six years ago, thermal coal sold for between US$60 to US$80 per tonne.

But while thermal coal prices have been spurred on by Russia’s invasion of Ukraine, it’s also important to note that thermal coal prices were already on an upward trajectory months before the invasion.

In short, Europe’s self-induced energy shortage led a resurgence back to coal power, with prices having soared to around US$200 per tonne, well before Russian boots set foot on Ukrainian soil.

Enter Russia

While the original drivers of thermal coal demand haven’t gone away, they have since been turbocharged by sanctions on Russian coal.

The net effect is that thermal coal, which is burned to produce power, became more valuable than met coal, which is used to make steel.

Based on Xcoal Energy and Resources’ numbers, the UK and Europe alone need to put their foot on 47m tonnes of coal which previously came from Russia. In total, Xcoal estimates the global coal supply gap at 96m tonnes.

These figures don’t take into account additional demand from China, where economic growth has stalled to its lowest point in decades, courtesy of covid lockdowns.

New EPS forecasts

While Macquarie has lifted its earnings per share (EPS) for some major miners, it’s also worth noting that these increases have more to do with price than production, with Australia’s coal production having peaked in 2016.

Due to a myriad of reasons, increased production – even in light of current demand - simply isn’t that easy with coal, and the capex argument for new and/or extended mine life is becoming increasingly difficult to justify.

Price targets up

BHP (ASX: BHP), Whitehaven Coal (ASX: WHC), Coronado Global Resources (ASX: CRN), and New Hope (ASX: NHC) were up 2.26%, 7.57%, 7.04% and 7.85% respectively at the open after Macquarie released price target and EPS upgrades:

BHP: Target price up 5% to $44.00, EPS forecasts up 4-6% for FY23 to FY26.

Whitehaven: Target price up 20% to $12.00, EPS forecasts up 28% in FY23 and by 100-200% for FY24-27.

Coronado: Target price up 3% to $3.60, EPS up 3-6% over 2023-27.

New Hope: Target price up 17% to $7.00, EPS up 34% and 163% in FY23 and FY24 and by more than 400% from FY25.

Coronado share price snapshot.