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The energy-market shockwaves from Russia’s invasion of Ukraine mean the world is only getting more dependent on thermal coal (as an alternative to gas). And as demand expands and prices surge to all-time highs, it means blockbuster profits for coal producers. Meanwhile, the world’s two biggest coal consumers – India and China – still have growth on the agenda. The Chinese government has tasked its industry with boosting production capacity by 300 million tons this year, and the nation’s top state-owned producer said it would boost development investment by more than half on the back of record profits.
Russia’s war in Ukraine has also caused supply chain dislocations that have sent thermal coal prices through the roof. Metallurgical coal can be used in thermal power station boilers to generate electricity if it is blended the right way, and with power producers desperate for coal supply, many coking coal producers have begun selling their coal into the thermal coal market, in what is as an arbitrage opportunity. And that opportunity has just gotten better. From August 10, bans on the sale of Russian coal to Europe kicked in, removing 187 million tonnes – about 20% of the world’s annual production – from the global market. Most European thermal coal buyers have been moving away from Russian coal since the invasion of Ukraine, but the ban will put further pressure on thermal coal supplies in the coming months.
To put things into perspective, surging coal prices have seen Glencore generate its biggest coal profit in its history – and this is just in the first half of its financial year!
Lithium major Pilbara Minerals (ASX: PLS) has just generated a strong, maiden full-year profit for the company. The company posted a 577% increase in revenue to A$1.2 billion, which underpinned EBITDA of $814.5 million. The results led to an inaugural statutory net profit after tax of $561.8 million, compared to a loss of $51.4 million a year earlier. The substantial rise in the average sale price to US$2382 per dry metric tonne of spodumene (cost and freight, China) resulted in gross margin of A$853.5 million, up from just $46.2 million a year earlier. Pilbara closed June with a cash balance of $874.2 million and was in a net cash position of $714.3 million, including $282.4 million of irrevocable letters of credit for recent spodumene shipments.
The lithium pricing environment is highly supportive of record profits. Prices of lithium in China are close to a record high, as a power crisis impacts EV battery production in an already-tight market. Sichuan is home to more than a fifth of China’s lithium production, and it has extended industrial power cuts this week amid the most intense heat wave in more than a half century. The supply disruptions will provide further support for lithium carbonate prices, which this week reached their highest level since April at just over $70k a ton, and are close to record levels. The near-record prices may also have ripple effects for downstream players, with EV battery prices already expected to increase this year for the first time in more than a decade.