King Coal has not been dethroned yet — should you buy?

On 30 September 2024, Ratcliffe-on-Soar, the UK’s last coal-fired power plant, shut off its last operating unit, Unit 4, for the last time. The shutdown marked the end of 142 years of coal-fired power generation in the UK and a new era for the country’s economy.

The countdown to closure began in 2015 when the government announced plans to end the UK’s coal-powered generation capacity, but the slow decline of coal-fired electricity power generation really began in the late 1960s.

Coal’s share of UK energy consumption fell from around 60% in 1965 to 35% ten years later, and by 2000 the share was down to the mid-teens.

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There’s no denying the vital role coal has played in the UK economy over the past two to three centuries. The country’s plentiful coal supplies helped drive the industrial revolution, powering the steam engines that dominated factories.

In the early 1700s, roughly three million tons of coal were mined per year. By the 1830s, that had climbed to more than 30 million tons. Thanks to the coal-powered economy, growth in real GDP per person peaked at about 1.25% per year in the mid-19th century. To put that number into perspective, real GDP per person has shrunk over the past five years. Overall GDP grew by 50% between 1870 and 1900.

Coal is a fantastic energy source. Once mined, it requires little to no effort to turn it into energy, and the yield, at around 30 megajoules (MJ) per kg (the actual amount varies by the type of coal used), means it gives off around 80% to 100% more energy than wood when burned.

The downside is carbon emissions. Coal is by far the dirtiest fossil fuel, giving off 100% more carbon emissions than natural gas and 50% more than other types of refined fuel, such as petrol and jet fuel.

As coal-fired plants go, Ratcliffe-on-Soar was one of the cleanest. It was the only coal-fired plant in the UK to be fitted with a Selective Catalytic Reduction (SCR) emission-control facility, capable of reducing NOx (nitrogen oxides) emissions by 70%-95%.

It was also equipped with a flue-gas desulphurisation (FGD) plant to remove sulphur dioxide (SO2 ) from the exhaust flue gases before they entered the atmosphere. But that wasn’t enough to save the plant from the relentless march of progress to cleaner, green energy.

Coal's global consumption boom

However, the UK’s move away from coal is the exception, not the rule. Global coal consumption has doubled in the past three decades and construction of new coal-powered plants in China reached a ten-year high in 2024 as the country began building 94.5 gigawatts (GW) of new coal-power capacity and resumed 3.3GW of suspended projects in 2024.

Forecasts suggest the global demand for coal will not disappear any time soon. However, despite the booming demand for the black stuff, investors have shied away from the sector, which presents opportunities.

There are several types of coal, all of which have different qualities and uses.

Anthracite is the oldest version of the rock, has the highest heating value of all ranks of coal and burns relatively cleanly compared with other types, making it perfect for the metals industry.

The next-best type is bituminous coal, which is used both to generate electricity and is an important fuel and raw material for making coking coal for the iron and steel industry.

Sub-bituminous and lignite are the least energy-intensive types of coal and lignite, due to its young age, usually has a high level of moisture content.

Alongside these different geological qualifications of the rock, there are broader industry definitions.

These are thermal coal – a blend of coal best suited for energy generation, and metallurgical coal (also called coking coal) – a mixture combined to achieve the desired properties for the production of the crucial steel-making ingredient coke.

The market for thermal coal is by far the biggest segment. The International Energy Agency (IEA) estimates global trade in coal to have reached a new all-time high of 1,545 million tonnes in 2024, split between thermal (1,178 million tonnes) and metallurgical (368 million tonnes).

Thermal coal is mixed to provide a high level of energy output with low levels of impurity. Indonesia is one of the world’s largest exporters of thermal coal, followed by Australia and South Africa.

The end for British coal

Coal transformed the UK because it was relatively easy to mine and transport. Coal deposits are localised around the world as they only form under specific geological conditions.

Most of the coal produced in the UK was produced from deep underground seams, formed over hundreds of millions of years. The early adoption of steam technology made it possible to access these seams, and because the UK is a small country, transporting coal from the mines to the industrial areas was a relatively straightforward and cost-effective process.

However, over the years the easy-to-access deposits have been mined away, and the cost of mining has increased dramatically. As coal is a widely traded commodity with a global benchmark, the high mining costs in the UK became increasingly uneconomic compared with global benchmarks. It eventually became uneconomic to mine in the UK.

In comparison, the giant city-sized mines that dominate the landscape in South Africa, Australia and Indonesia are far cheaper to operate. Australia’s largest coal mine by output is a surface mine, which means it has a significant cost advantage over deep mines, even though it has to be transported across Australia and around the rest of the world.

A close look at a global giant

Glencore is one of Australia’s largest exporters of coal, with 15 operational mines employing 10,000 people across New South Wales and Queensland. Most of the coal produced by the company’s Australian mines is exported, to be used both for steel making and generating electricity.

As a business, Glencore, one of the world’s largest producers and traders of coal, mined just under 100 million tonnes of thermal coal in 2024 and 19.9 million tonnes of metallurgical coal. The bulk of the company’s metallurgical coal was produced in Canada, from the Elk Valley Resources (EVR) business acquired from Teck Resources in July 2024.

Breaking down earnings from the company’s coal business gives us a real insight into how the industry works. Of the two primary types of coal, the coal used for generating energy is far cheaper to produce. It cost the company’s $68.1 per tonne to produce in 2024, down slightly from the $70.5 per tonne recorded in 2023. The cost of producing coal used in the steelmaking process was $115.6 per tonne compared with $141.3 per tonne in 2023.

Glencore reported an average sale price of steelmaking coal production for the year of $201.5 per tonne, down from $267.4 per tonne achieved in 2023. Both were significantly below the average settlement price negotiated between the company and buyers as the price had to be adjusted based on the mix of coal produced and sold. In 2024, the average realised price of steel-making coal sold by Glencore was $39.2 per tonne, below the $240.7 per tonne settlement price for prime high-coking coal. In plain English, the company had to give buyers a discount because its mix of metallurgical coal was of a lower quality.

The price for the company’s thermal coal production is benchmarked to the Newcastle coal price – named after the largest coal export port in the world, based in the Newcastle region of New South Wales, Australia. In 2024 the average price for Newcastle coal as reported by Glencore was $134.8 per tonne, down from $172.8p per tonne recorded in 2023. The company had to accept a discount of $34.2 per tonne in 2024 compared with the market price based on the quality of coal it supplied.

Glencore made a healthy profit on all the coal it produced and sold into the market in 2024.

The group reported adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) of 45% for steel-making coal and 32% for energy coal. Glencore’s pricing data provides an insight into how different types of coal are priced and sold into the market.

It’s also worth noting that these prices do not include transportation costs, which can add about $40 per tonne to the cost, depending on volume, distance and transportation method.

For example, transporting coal across the US by train can cost as little as $10 per tonne, but moving it by trucks from key ports in Africa can add $40-$50 per tonne, excluding shipping costs.

The great coal sell-off

Glencore purchased the Elk Valley business from Canadian mining giant Teck in 2024 for $7 billion in cash as part of the latter company’s efforts to focus on metals key to the energy transition.

The deal was just one of a string of asset sales agreed in the coal sector over the past couple of years by companies looking to reduce their exposure to the industry. Anglo American put its Australian steel-making coal business up for sale in 2024 and inked a deal to sell all of it towards the end of the year (across two transactions).

Rio Tinto sold its last remaining coal mine in 2018, the same year BHP announced its withdrawal from the World Coal Association in the first quarter of 2018. Over the following years, BHP also exited a number of its coal ventures and abandoned plans to extend the life of some mines.

The decision by miners to quit coal has been driven almost entirely by the desire to appease environmentalists. Even though demand for coal is still growing, investors don’t want any exposure to it in their portfolios.

According to the latest estimates from the IEA, global coal demand rebounded strongly after the pandemic to hit a record high of 8.8 billion tonnes in 2024. The IEA expects demand to remain at about this level over the next couple of years into 2027, despite increasing use of renewable energy in the global energy system.

Coal is going nowhere

Demand for coal is increasing in some emerging economies, where electricity demand is rising with population and economic growth.

These countries can’t build renewable assets at the same scale as developed economies and are therefore relying heavily on coal to fill the gap.

For example, over the next two years demand from China is expected to decline, but increased demand from India and the rest of the world is expected to offset the shrinkage. The demand from India will be driven by the country’s increasing demand for steel. The country’s key steel-makers, Tata Steel, JSW, JSPL and ArcelorMittal Nippon Steel (AMNS), have all laid out plans to increase capacity significantly over the next couple of years, driving demand for high-quality metallurgical and coking coal.

As a whole, the market for metallurgical coal is growing three times faster than thermal coal.

Overall, 71% of the steel made around the world is made with steel-making coal and blast furnaces, and this market is proving to be a lot more resistant to change than the thermal coal market.

There are alternatives to high-quality metallurgical coking coal in the steel-making process, such as hydrogen, but they are still incredibly expensive.

The main alternative, electrical arc furnaces, are fed with recycled steel or iron smelted with natural gas and hydrogen to create new steel, and these now make up around 29% of the global steel-production market, according to the World Steel Council. Still, cost is an issue. Electrical arc furnaces are incredibly power hungry and their use is, in some cases, driving demand for thermal coal electricity generation.

In short, the demand for coal around the world is set to remain relatively steady over the next couple of years. For investors who are willing to focus on the fundamentals of the market, opportunities abound.

The stocks to buy now

Glencore (LSE: GLEN) is one of the most obvious ways to play the coal market over the coming years. The company’s earnings from its coal production and trading and marketing activities came in at just under half of adjusted Ebitda for 2024.

Coal is a big business for the company, but it’s also a massive producer of copper, zinc and lead, as well as other vital metals. The group’s trading and marketing arm is also an incredibly underappreciated asset.

Glencore is one of the world’s largest commodity traders. It has access to a vast network of trading posts, ships, pipelines and unrivalled levels of information. That means it can extract profits in these opaque markets and move commodities to where they need to be, extracting the greatest profit in the process. Trading has netted the company billions in profit, but the division is a bit of a black box, requiring hundreds of billions of dollars in capital and incredible levels of liquidity on a daily basis.

The recent commodity market volatility has benefited the company, and last year it earned a healthy $4.8 billion in free cash flow. In the company’s 2024 results it promised cash returns of $2.2 billion, split between dividends and share buybacks, and further capital returns in the year ahead. The stock is now trading at a forward price-to-earnings (p/e) multiple of 11.7 and estimates suggests a potential dividend yield of 4.6% for 2025 and 6.2% in 2026.

Thungela (LSE: TGA) was spun off from Anglo American in 2021. It’s a South African thermal coal miner with some assets in Australia. The company was valued at roughly £200 million at its IPO, and today it’s worth about £667 million.

As a pure-play coal producer, Thungela is unloved and unwanted, but it still produces a product people are happy to pay for on the open market. The company’s sales and Ebitda are expected to increase modestly over the coming years, and based on current projections, the stock is trading at a forward p/e multiple of just 2.4.

Thungela is also cash rich, and though the company has made commitments to mergers where possible, it has also outlined plans to return significant amounts of profit to investors. Panmure Liberum analysts Duncan Hay and Tom Price expect a yield of 34% for 2025 and 43% for 2026.

Yancoal Australia (Sydney: YAL) is listed in Australia and Hong Kong. With a market capitalisation of A$7.8 billion (£3.9 billion), it’s one of the largest pure-play coal miners, with assets in New South Wales, Queensland and Western Australia.

The company earned A$1.2 billion net in 2024 and is expecting flat production for the year ahead, which, assuming coal prices also remain flat, suggests a similar return in 2025. That puts the stock on a forward p/e of roughly 6.5, and its dividend yield stands at about 11%.

Core Natural Resources (NYSE: CNR) is the largest US-listed pure-play coal miner. Formed by the merger of Consol Energy and Arch Resources at the beginning of the year, the company is still in the early stages of trying to convince Wall Street it’s worth buying.

As a result the stock is trading at just 5.9 times consensus forward earnings. Analysts expect a yield 5.4% for 2025.

Peabody Energy Corp (NYSE: BTU), Alpha Metallurgical Resources (NYSE: AMR) and Warrior Met Coal (NYSE: HCC) are the next three largest US-listed players.

Alpha is the cheapest of the bunch, trading at a 2025 forward p/e of 4.7, according to consensus Wall Street estimates. It has roughly $500 million of cash on its balance sheet and a market capitalisation of $2 billion. Like many US companies, Alpha has a preference for share buybacks so doesn’t pay a dividend, but the group has reduced the number of shares outstanding by 50% since 2018.

Options elsewhere in the world include Exxaro Resources (Johannesburg: EXX), one of the top five producers of coal in South Africa, and Whitehaven Coal (Sydney: WHC).

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