Energy markets Globally are in a period of heightened turbulence as the world tries to cope with the energy crisis brought on by the Russia Ukraine war. Oil and natural gas have received most of the world's attention due to the lack of these recourses and increased prices, brought on by sanctions against Russia. The world however has turned to the less popular sibling coal, as an interim solution in solving the current energy crisis. This has resulted in increased demand for the commodity which has thus pushed prices up to record levels during 2022.
Global demand:
Global markets have had to deal with Covid-19, lockdowns, and heightened regulation in China as well as the Russian war. This has heightened volatility and resulted in large price pullbacks in certain sectors, however the worlds consumption of coal is set to rise.
Based on a report published by the IEA (International Energy Agency), Global coal consumption is set to rise by 0,7% in 2022 to 8 billion tonnes. This Global total forecast is set to match the all-time recorded consumption set back in 2013. Demand for coal in India has been strong since the start of 2022 and is expected to rise by 7% for the full year as the country's economy grows and the use of electricity expands.
Coal consumption in the European Union is expected to rise by 7% during 2022 on top of last year's 14% jump. This is being driven by demand from the electricity sector where coal is increasingly being used to replace gas, which is in short supply and has experienced huge price spikes following Russia's invasion of Ukraine. In China, coal demand is estimated to have declined by 3% in the first half of 2022 as renewed Covid lockdowns in some cities slowed economic growth, but an expected increase in the second half of the year is likely to bring coal consumption for the full year back to the same levels as 2021.
Coal price:
Reduction in supply of natural gas and oil coupled with increasing prices, has made coal more attractive in many markets, causing international coal prices to soar, hitting three all-time peaks between October 2021 and May 2022. Sanctions and bans on Russian coal following Russia's invasion of Ukraine have disrupted markets, and issues in other major exporters have contributed to supply shortages, further increasing prices:
Listed coal companies:
The increase in Global demand for coal as well as increased prices has seen coal company profits soar during 2022. Some of the biggest coal producers in the world have locked in huge profits so far this year, seeing soaring share prices as well as high dividend yields. Commodity giant Glencore reported coal earnings of $8.9 billion which equated to a 900% increase in the first half of 2022. Increased company earnings are resulting in large pay days for investors as well as more capital investment in new mining opportunities.
2022 has seen a resurgence in a commodity that was essentially in the process of phasing out by the world in a bid to secure cleaner and more environmentally friendly energy supplies. As a result, financing and investment was going to other forms of energy and not coal before the Russia Ukraine war. Because of this, coal producers have made even more money due to a reduction of suppliers globally. Investors who turned to coal companies have been rewarded and on local shores a JSE listed coal producer has delivered the scarce 10 times return to JSE investors:
Thungela Resources:
Thungela Resources which was created through the demerger and separate listing of Anglo American's former export coal mines mid-way through 2021 at R20.00 per share. Since then Thungela has increased their earnings per share by more than 2000% and declaring an interim dividend of R60.00 per share on the 15th of August 2022 which equates to roughly a 20% dividend yield on the share price at the time.
The group has more than doubled revenue to R26.2 billion in the six months ended June 2022, which saw profits skyrocketing to R9.6 billion up from R351 million. As fantastic as the results have been, volumes of coal could still have been higher if Transnet was able to deliver the requested coal volumes to the Richards Bay coal terminal. These missing export volumes cost the group just under R2.5 billion in potential revenue and has categorized as a clear opportunity cost. The group however is looking at their own modes of transport to utilise in resolving the transport issue and ensuring required volumes of coal are delivered going forward.
In a time of market volatility and equity price pull back, investors who turned to Thungela would have seen returns of over 1000% since listing, which shows that opportunity is always there, and that 10x investments are still present on the JSE for those prepared to look.
In closing:
2022 was a massive year for coal. For those investors with exposure to coal companies such as Thungela Resources, the coal price will determine how much further share prices can continue to run. The lesson from the 2022 coal run, is that investors must always be on the lookout for how geopolitical events will impact supply and demand. Coal is not the first commodity to run on account of geopolitical news and it will not be the last. As investors we need to be on the lookout for what commodities will be in short supply going forward and look to capitalise on this with our investments.
