Everyone has been pleasantly surprised by the recent run up in the metallurgical coal price. From around $82 per tonne – where commentators were saying it would remain for the next decade, it has shot up spectacularly to over $200 per tonne for premium hard coking coal. Now I’m sure that it will retreat somewhat from the latest run, but my view is that the long term is looking bright for premium metallurgical coal producers.

I can see premium hard coking hitting $300 at times over the next 5 years and then staying above $300 for decades to come. The reason is that supply of the premium stuff is not as plentiful as some assume. While there is metallurgical coal everywhere, the percentage of coal in the ground that is premium hard coking coal is small and declining as reserves are used up. As existing metallurgical coal mines get deeper, the coking properties typically degrade.

Many existing premium met coal producers will transition to producing PCI style coal in the next decade or two, leaving a hole in the premium market. Existing steel mills will have no choice but to pay a premium for hard coking coal, which in turn spur another phase of mining in areas that are currently thought to be uneconomic.

Anyone sitting on reserves of high quality coking coal will cash in big time.