Our Approach to Market Outlooks & Price Forecasting

In evaluating the coal companies we cover at TCT, we examine management expertise, balance sheets, coal geology and access to barge, rail and port infrastructure. But perhaps the most important piece of analyzing these companies is understanding where the coal price is going. That is why we write Market Outlooks for Premium Subscribers, so they understand the direction and magnitude of upcoming coal price changes.

Our price forecasts are based on years of industry experience riding the ups and downs of coal pricing. We start with a strong understanding of the cost of production, then we read the demand trends and track stockpiles. We watch for the occasional weather disruption, bridge collapse or fire and handicap the magnitude of those impacts. Critically, we also factor in the commodity price cycles that are a feature of this industry.

Mining is notoriously cyclical, with volatile commodities prices impacting company valuations and equity prices. The cycles are driven, among other things, by the time it takes to bring on new supply –  several years for a new coal mine. It requires similar lead times to permit and complete the investment in a steel mill or thermal power plant. Another factor is that when commodity prices are low, no miner wants to be the first to pull back production as he has high fixed costs to cover. He might also have multi-year take-or-pay commitments with railroads and ports that keeps him mining even when prices are low. Instead, he hopes that his competitors might pull back or go belly up first. And so price down cycles can be extended.

During price up cycles, miners, driven by the euphoria of high prices or improved access to capital, often deploy investment capital at cycle highs. Of course the flip side is also true, with miners pulling back capital spending during price routs, especially at smaller companies and for exploration projects. A 2020 article by Mckinsey estimates that the correlation between investment spend and prices was 73% over the prior decade. That kind of “pro-cyclical” behavior deepens the volatility that we see in prices. We track this pro-cyclical behavior in the market in developing our price forecast, and we also applaud the mining company management teams that act against the cycle, to position for what’s next.

Price cycles in mining are the reason for the old saw that investors don’t want to “own” mining stocks like they might a blue-chip consumer goods company that they buy and hold. Instead, investors are better off “renting” mining stocks when the price cycle is moving in their favor. TCT strives to guide you through these coal pricing cycles, indicating when pricing is likely to work in your favor and how to position yourself for when the cycle turns.