There are two principal types of coal: coking and thermal. Coking coal is heated in an air free oven to produce coke and various volatiles. The coke is virtually all carbon and is used as a reductant with iron ore to produce steel. Thermal coal is of a lower quality and is typically burnt in a power plant to produce electricity.

The coking coal price currently ranges for USD90/t to USD130/t depending upon quality and how it is shipped. Thermal coal out of Newcastle is trading at around USD50/t while poorer quality, such as some Indonesian coal, is trading as low as USD24/t.

The coking coal price tends to follow the iron ore price, both are currently high as a result of Chinese steel demand. Thermal coal prices are low because of lower demand for its use in power plants.

Boy Coal Miner

And Kids today Think They Have it Tough

The Future

China is in stimulus mode to mitigate further economic decline. A significant part of the stimulus is infrastructure and housing, which require large quantities of steel. Chinese steel production is likely to remain high for at least the short term, thus underpinning the coking coal price. However, declining demand in North America and Europe could well be a dampener on price.

The future for thermal coal is not as bright. It is perceived as the most polluting fuel source for electricity production and Europe is consuming less each year and plans to ultimately ban its use. LNG and renewables are taking its place. Meanwhile China is lifting its production of thermal to reduce dependence on imports.

ASX Coal Stocks

There are around 30 ASX listed pure coal producers with a handful of diversified miners, such as BHP. Read about the pure plays here. Most have seen significant price declines oner the past year or so and some thermal coal producers will be unprofitable. It is the same around the world, with a number of large US coal producers having already gone under.

It is difficult to make a positive case for thermal producers and they are probably best avoided, at least until future demand becomes clear. Profitable coking producers may be worth a look, as most coal stocks have had significant price declines.