Don’t believe the spin: Coal is no longer essential to produce steel

This analysis is for information and educational purposes only and is not intended to be read as investment advice. Please click here to read our full disclaimer.

A new Australian government forecast adds to the growing body of evidence that the long-term outlook for metallurgical coal is not as strong as the mining industry would have us believe.

Despite this, Australian governments are parroting misleading mining industry spin conflating metallurgical coal demand with the need for steel to build renewable energy infrastructure.

Although its prospects are not yet as bad as those of thermal coal, the reality is that the outlook for metallurgical coal is increasingly challenged by multiple threats.

“Risks to navigate”

The Australian government’s March 2024 Resources and Energy Quarterly (REQ) report highlights that world trade for metallurgical coal is declining. From 349 million tonnes (Mt) traded in 2023, trade will drop to 333Mt by 2029. Australia is the world’s largest met coal exporter by far, but Australian exports are forecast to peak in two years’ time and then decline out to the end of the decade.

This does not sound much like a commodity with a long and bright outlook, unaffected by technology change.

The new REQ claims that metallurgical coal’s “fundamentals remain favourable”. However, it adds that “there are risks to navigate”, and that “Higher electric arc furnace (EAF) and green steel production may harm the demand for metallurgical coal from steel mills using blast furnaces.”

The mounting risks mostly appear to be on the downside.

While the REQ maintains that the rate of technology change from coal-consuming blast furnaces to EAF and direct reduced iron (DRI)-based steelmaking “remains unclear”, it should at least be clear by now that technology change in the steel sector is accelerating, as IEA chief Fatih Birol highlighted last year.

The future of the metallurgical coal trade will be defined by the two largest importers – China and India.

The REQ states that Chinese metallurgical coal imports are already in decline and are expected to drop 27% by 2029. Chinese steel demand is currently impacted by a property downturn, but it is also entering long-term decline as its economy matures. In addition, China’s steelmakers will switch to more EAF steelmaking utilising greater quantities of scrap steel, and they are already constructing DRI plants at commercial scale that don’t use coal.

India is the world’s key steel demand growth market, and the new REQ sees its metallurgical coal imports rising out to 2029, albeit at a lower rate than the March 2023 forecast. The Indian government is targeting an almost doubling of steelmaking capacity to 300Mt by 2030, with most of the expansion planned to be blast furnace-based. However, there are reasons to believe that may not be achieved.

Last month S&P Global Ratings warned that high metallurgical coal prices could maintain or even increase Indian steelmakers’ debt levels for longer than previously anticipated. S&P highlighted that prolonged high debt levels would impact Indian steelmakers’ expansion plans. This would put the planned expansion to 300Mt of capacity in jeopardy, a further downside risk.

As we’ve seen with thermal coal, periods of high metallurgical coal prices can negatively impact long-term demand. India’s energy security concerns may also drive it to embrace steel technology that can use domestically produced energy, such as green hydrogen, earlier than expected.

Carbon capture, utilisation and storage (CCUS) is in no position to protect the outlook for metallurgical coal either. There is not a single commercial-scale CCUS plant for coal-based steelmaking anywhere in the world, and virtually nothing in the pipeline. In other words, there is no viable solution that will allow the continued use of metallurgical coal in a low-carbon global steel industry.

Coal industry spin

Despite growing doubts about its outlook, or perhaps because of them, the industry is very keen to say that metallurgical coal has a rosy future.

Glencore CEO Gary Nagle – who is seeking to close the acquisition of the Canadian metallurgical coal operations of Teck Resources – stated in the company’s most recent earnings call: “We don’t see demand erosion or demand destruction in material shape or form in the short, medium or longer term to be quite honest.”

In its 2023 preliminary results presentation, Glencore provided a stylised version of Wood Mackenzie’s November 2023 long-term metallurgical coal forecast, which made its forecast increase in demand for hard coking coal look much larger than it really is.

Helpfully, Stanmore highlights the same Wood Mackenzie forecast in its 2023 full year results presentation, only with more detail. The forecast is for supply of seaborne hard coking coal to rise only 4Mt by 2033. That’s less than 2%.

Even that small rise looks optimistic given the Australian government’s new medium-term metallurgical coal forecast. WoodMac does also forecast a 15% increase by 2050, but such a long-term forecast will be thoroughly challenged by steel’s accelerating technology shift away from coal.

Stanmore also shows us the breakdown of the forecast by supplier. By 2033, Australian supply of hard coking coal will be virtually unchanged, according to Wood Mackenzie, while North American supply will have dropped 14Mt (21%). The gap will be filled by increased supply from Russia.

In other words, the outlook for the Canadian metallurgical coal operations that Glencore is acquiring does not look as good as has otherwise been indicated. The Australian government’s new REQ forecasts that Canadian metallurgical coal exports are already in decline.

It’s clear why Glencore would want to talk up the prospects of metallurgical coal. It plans to combine the metallurgical coalmines it is acquiring from Teck with its thermal coal operations before spinning them off as a separate entity. There is already clear indication that some Glencore investors don’t think that’s a very good idea.

Glencore needs the future of metallurgical coal to look good to distract from the increasingly poor outlook for the thermal coal operations that will be included in the spun-off coal mining company.

Glencore’s bid to give metallurgical coal a sheen of optimism ahead of its proposed coal spin-off is a tough sell. The great majority of the spun-out company’s production will be thermal coal, mostly mined in Australia. The new REQ forecasts that the thermal coal trade in Asia – considered the key market going forward – is already in decline.

Industry and governments link met coal demand to the renewables transition

In a further bid to talk up the future of metallurgical coal, Glencore conflates metallurgical coal demand with the ongoing energy transition away from fossil fuels: “High-quality steelmaking coal also supports the energy transition as an essential input into steel production needed for certain renewable energy infrastructure.”

While it’s true that a lot of infrastructure like wind and solar power will be built in greater capacities going forward, the increasing steel technology shift away from coal means that, though steel will be needed, metallurgical coal will be required in declining volumes. The accelerating shift towards DRI and EAF-based steelmaking means that coal can no longer be considered critical for steelmaking.

Glencore is not the only coalminer to make the claim that metallurgical coal is essential to the energy transition. Others like BHP, Whitehaven Coal and Coronado repeat the same spin, which then gets parroted by government politicians trying to justify their approval of more metallurgical coalmines.

Australia’s Federal Minister for the Environment and Water Tania Plibersek has linked metallurgical coal and the need for more renewables infrastructure to justify her approval of new metallurgical coalmines. Queensland Deputy Premier and Treasurer Cameron Dick has done the same.

Coalmining investors and governments need to wake up to the fast-changing outlook for metallurgical coal. Glencore investors especially need to accept that adding some met coal production doesn’t significantly change the outlook for a predominantly thermal coal spin-off.