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It’s a unique time for materials stocks. While COVID-19 has taken its toll on the resource industry, demand for industrial metals like steel — along with crucial steelmaking counterparts like coking coal — has stayed robust.
Now, as the Australian Government prioritises infrastructure spending and its appetite for steel grows, demand for coking coal is on the rise.
On the other side of the coin, softened demand in China has seen India rise as a steelmaking powerhouse. And, as one of the world’s largest exporters of coking coal, Australia is primed to supply the evolving producer.
The bottom line? Both of these trends bode well for our homegrown coking coal players. And Bowen Coking Coal (ASX:BCB), which is exploring six projects within Australia’s premier coal reserve, is on the cusp of supplying the booming demand.
Infrastructure boom
This year, Australia’s Federal Government was tasked with delivering a budget like no other.
The challenge was to absorb the steep and enduring economic impact of the global pandemic and produce a roadmap to support Australians in the decade to come.
For the Morrison Government, a big part of the nation’s recovery is tied to infrastructure. And to support this industry, it’s spending a record $110 billion on infrastructure projects over the next ten years.
“Now, with the world facing the most challenging economic situation since the Great Depression, the Australian Government’s investment in infrastructure is vital for supporting jobs,” said Michael McCormack, Deputy PM and Minister for Infrastructure, Transport and Regional Development.
“This investment will also ensure we build the infrastructure needed to get Australians home sooner and safer as well as to drive long-term productivity,” he continued.
It’s hoped this cash injection will get major transport projects — particularly road and rail creation — up and running in the short term. And as construction gears up across the country, steel will become a hot commodity — the durable, lightweight and robust metal is the obvious choice in the vast majority of infrastructure projects.
To meet the rising demand, steel production also needs to grow. And there’s one ingredient which plays a crucial part in the steelmaking process: coking coal.
What is coking coal?
Coking coal (also known as metallurgical coal) is a key ingredient in steel creation. When they’re heated up, coking coals go through a plastic stage before they resolidify, forming coke particles — fuel for the blast furnaces which churn out steel.
To transform an iron alloy into the industrial metal, producers need carbon — which is created when the coke particles are burned — to turn the iron ore into liquid steel. But the grade of the coke particles (and the coking coals from which they’re formed) affects the quality of the steel produced — meaning there’s increasing demand for quality metallurgical coal.
It’s estimated that roughly 70 per cent of all steel made uses coal in its production process, while around 800 kilograms of metallurgical coal is needed to make one tonne of steel.
All things considered, coking coal is a desirable commodity — and Australia is arguably well-positioned to meet demand as one of the world’s largest exporter of metallurgical coal.
Where’s the demand?
Ten years ago, China was far and above the world’s largest producer and consumer of steel.
But in the year’s since, other countries like India have come to the fore, and their appetite for steelmaking has continued to grow.
Bowen Coking Coal’s Executive Director for Corporate Development, Blair Sergeant, estimates India’s demand for high-quality coking coal will remain healthy.
“When it comes to seaborne-traded coking coal demand, India is currently buying the same volumes as China, both representing approximately 20 per cent each of the market,” Blair stated.
“The coking coal price is not a ‘China’ story … looking at the forecast demand profile in 20 years, Wood Mackenzie has forecast that India will require over 140 million tonnes of seaborne coking coal, compared to China’s 55 million tonnes,” he explained.
Conversely, while India’s hunger for metallurgical coal has increased, China’s demand for the steelmaking stalwart has softened. In early October, Queensland’s treasury conceded that steel’s recyclability could weaken China’s production market.
“Looking beyond 2020, the potential for China to increasingly recycle steel scrap may lower the demand for metallurgical coal imports to China in the medium term,” the office stated.
In a 2018 bulletin, titled ‘The Changing Global Market for Australian Coal,’ the Reserve Bank of Australia (RBA) predicted Indian steel production was on the rise.
“In contrast to an expected moderation in Chinese steel production, Indian steel production has been growing strongly, and this is expected to continue over the next decade,” the RBA report read.
“Growth in Indian steel production is supported by an ambitious government target to triple output capacity to around 300 million tonnes by 2030, as well as plans to expand its manufacturing sector,” it continued.
What does it mean for Bowen Coking Coal?
Situated in Queensland’s Bowen Basin, Bowen Coking Coal is in a prime position to one day supply the rising demand for the steel ingredient.
Interestingly, the sunshine state’s Bowen Basin hold’s the country’s largest coal reserves. Rich in coal and gas deposits, the basin spans between 60,000 and 75,000 square kilometres across Australia’s northeastern state.
Currently, Bowen Coking Coal is exploring six projects within the basin — four of which it owns, while the other two are held in joint venture agreements with Stanmore Coal (ASX:SMR).
Isaac River is BCB’s most advanced exploration play, and the company is hoping to get the project “shovel-ready” in around a year’s time.
According to Blair Seargent, the company’s outstanding portfolio has primed it to meet the growing demand for coking coal. And, with a spike in demand comes a surge in pricing.
“Given the expectation that global steel production will once again rise with easing of COVID restrictions and a global stimulus expected to be infrastructure-heavy, the expectation is a resulting strong rally in the underlying coking coal price,” the Executive Director explained.
Broadmeadow East Acquisition
Just last month, BCB finalised its acquisition of the Broadmeadow East Coking Coal Project. Significantly, that holding includes a “granted, but undeveloped” exploration licence, said to contain 33 million tonnes of coal resource.
Speaking to the acquisition, Bowen Coking Coal Managing Director Gerhard Redelinghuys said the company was genuinely excited to execute the buy ahead of schedule.
“As the project sits on a granted mining lease, Broadmeadow East now becomes our most advanced open-pit coking coal project,” he explained.
“Alongside Hillalong and Isaac River, we now have three open-pit coking coal projects which we are driving towards production. This reflects our intention to become a significant producer of high-quality coking coal from Queensland ‘s premier Bowen Basin in the near term,” the Managing Director concluded.
BCB on the ASX
The last six months have proved fruitful for BCB’s share price: the company has recovered from the widespread mid-March slump to sit just shy of its 2020 high.
While company shares sunk to 2.9 cents on March 23, they’ve since soared — reaching 6.14 cents in early October.
The spike came just after the company announced it had lodged an environmental authority application for its Isaac River Project.
It seems that as the hunger for steel — and its crucial production counterpart — continue to grow, Bowen Coking Coal is set to thrive.
“Bowen, with a number of coking coal projects moving closer to development every day, is well-placed to benefit from this expected rising price environment,” Blair Seargeant signed off.
BCB shares are worth 5.3 cents in midday trade on Monday.