Our Approach to Market Reports & 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 publish Market Reports 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, and increasingly on models built from physical data. We start with the cost of production, mine by mine. We build demand from the bottom up, importer by importer, from steel and pig iron output, and set it against supply from each exporting country, including China’s own mines and its imports from Mongolia and Russia. We track stockpiles and, now by satellite, the queues of ships waiting at coal ports. We watch for the occasional weather disruption, bridge collapse or mine fire and handicap the magnitude of those impacts. We test each model against history before we rely on it. Critically, we also factor in the commodity price cycles that are a feature of this industry.

Mining is notoriously cyclical, with volatile commodity 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 keep 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. Our approach has never changed, and it never will. The only thing that changes from here is how much more data we use to calibrate our judgment.

Our Market Reports

• Met Coal Short-Term Outlook: a report published monthly, with a 2-year price outlook for seaborne met coal by grade, built on supply, demand and trade balances, with scenarios and PDF and Excel downloads.
• Thermal Coal Market Outlook
• US Quarterly Coal Production and the Production Data Tool

Coming next: Met Coal Long-Term Outlook, Thermal Coal Short-Term and Long-Term Outlooks, and US Supply Region reports covering production, costs and mapping by basin.