Despite the widespread belief that coal is a dying industry, the metallurgical, or coking, coal used in steel production is proving to be a diamond in the rough for mining companies. As banks, insurers, and investors have increasingly shunned the carbon-intensive fossil fuel, the coking coal segment has emerged as a bright spot, attracting a surge of merger and acquisition (M&A) activity.
While thermal coal, used for power generation, faces an increasingly grim outlook, the lingering demand for coking coal to fuel blast furnaces in steel production has kept this corner of the industry burning strongly. Recent transactions suggest there is no shortage of suitors for coking coal assets.
Glencore is in the process of acquiring 77% of Teck Resources’ coal business in a deal valued at $9 billion, or more than 4 times the division’s estimated EBITDA for next year. In Australia, which accounts for roughly half of global coking coal exports, a BHP-Mitsubishi joint venture recently sold two mines for around 3 times EBITDA, or $3.2 billion, to Whitehaven Coal, which may sell a minority stake to a steelmaker.
The appeal of coking coal lies in its unique role in the steel-making process. It provides the heat and carbon necessary for blast furnaces to turn iron ore into molten iron, which is then used to produce about 70% of the world’s 1.8 billion tons of steel each year. The remaining steel is produced using scrap metal and electric-arc furnaces, a lower-energy process that uses less, if any, coal.
However, the dirtier blast furnace method is expected to continue growing in India and other parts of Southeast Asia, where production could jump 50% by 2050, according to Wood Mackenzie analysts. This could provide a lifeline for coking coal producers, even as the steel industry faces increasing pressure to transition to cleaner, low-emissions alternatives.
The mining M&A activity in the coking coal sector highlights the industry’s efforts to justify their strategies in the face of this impending shift toward a lower-carbon future.