Big Macro: Long-Term Bull Thesis On Metallurgical Coal
By: Jon Costello
Today’s low coal stock prices present an unusual opportunity for investors who seek a set-it-and-forget-it alternative to hold for many years. In fact, if I had to make one investment that I wasn’t allowed to monitor or sell over the next ten years, it would be a coal stock.
Before discussing individual investment opportunities, this article provides an overview of the coal market for investors with limited knowledge of the sector. It reviews coal economics and the bull and bear cases for metallurgical coal. It then turns to the ongoing supply response that I expect will send metallurgical coal prices higher even if demand remains flat. Future articles will discuss my favorite individual coal names.
The Two Kinds of Coal
Metallurgical coal (met coal), also known as coking coal, is used to produce the coke required for operating blast furnaces in steelmaking. Met coal also has some smaller-scale industrial uses.
Coke provides the heat necessary to melt iron ore into a liquid metal. Carbon in the coke removes oxygen from the iron ore, leaving behind pure iron. Coke also provides a porous bed in the blast furnace, allowing gases and molten materials to pass through it. The modern steelmaking industry consumes massive quantities of coke. For every ten tons of steel produced, four tons of coke are required.
Thermal coal is burned for electricity generation in power plants. It is also used in cement and industrial heating.
Metallurgical coal has certain properties that thermal coal lacks. First, it must be able to soften, liquefy, and revert to a porous solid when heated in the absence of oxygen. To prevent impurities from accumulating in steel, the coal must have low ash, sulfur, and phosphorus content.
Hard coking coal is the highest quality coal for steelmaking. Semi-soft coking coal is of lower quality and is typically blended with HCC in producing coke. The primary coal benchmarks are Platts Premium Low Volatile (PLV) in Australia and High Volatile A (HVA) and High Volatile B (HVB) benchmarks in the U.S.
Thermal coal is widely traded on global exchanges. ICE Newcastle Coal Futures trade on the ICE Futures Europe exchange. The contracts allow electric utilities to hedge their fuel costs.
Coking coal is not as heavily traded over exchanges as thermal coal. While there is a futures contract for metallurgical coal in Australia for hard coking coal, it experiences limited trading activity. There are no U.S.-based met coal futures. Futures are therefore a less reliable means of price discovery than in more liquid commodity markets. “Spot” met coal prices can be difficult to determine. Even widely used benchmark pricing assessments are criticized by industry watchers as inaccurate.
The global coal market is massive. Globally, approximately 6.7 billion metric tons of thermal coal are produced annually. Approximately 1.7 billion metric tons of met coal are produced annually, representing a roughly 80%/20% split between thermal and met coal. Only 3.3% of total coal production is comprised of premium hard coking coal.
Even at current production volumes, the world possesses well over 100 years of reserves of thermal and met coal.
China is the largest coal producer, with 4.5 billion metric tons of annual output. Most of the production is thermal coal. Chinese production accounts for 54% of total global production.
By contrast, the U.S. produces roughly 580 million metric tons of coal. Of the total, 510 million metric tons is thermal coal, and 70 million is met coal.
Around 1.5 billion metric tons of coal are exported annually. The total includes approximately 1.1 billion metric tons of thermal coal and 370 metric tons of met coal. Australia is the largest exporter of met coal, at approximately 175 million tons per year, nearly 50% of global exports. The U.S. produces around 63 million metric tons of met coal and exports 51 million metric tons.
Met coal fetches a premium to thermal coal due to its relative scarcity and the quality requirements necessary as an input for steelmaking. Thermal coal used in electricity generation simply has to burn. While there are various grades of thermal coal depending on energy content, the specifications for coal used in electric power generation are less stringent.
Coal used for making steel, by contrast, has few substitutes, which makes met coal demand relatively inelastic to prices compared with thermal coal. The lack of geological availability of high-quality met coal introduces a structural supply constraint into the market.
Over the five years, premium met coal prices have averaged $200 to $250 per metric ton, while thermal coal has averaged around $100 per metric ton.
Global Coal Demand Drivers
Met and thermal coal each have unique demand drivers. Thermal coal competes with other power generation alternatives, such as natural gas, solar, and wind. Thermal coal demand is therefore more sensitive to coal prices and their levels relative to other commodities serving as energy substitutes, such as natural gas.
Met coal demand depends on the current state of the global steel market. The current supply/demand balance of steel, the longer-term steel supply/demand outlook, steel prices, and steel inventories all influence met coal economics.
The long-term outlook for met coal is strong. Steel will continue to be used for centuries. It forms the main structural support in infrastructure, automobiles—both internal combustion engines and EVs—ships, buildings, and many other products and structures.
The greatest competition for steel sourced from virgin materials is recycled steel. As the latter displaces the former, less met coal is required in steel production. Advanced economies like the U.S. rely on steel recycling to produce new supply. Steel can be recycled repeatedly without suffering a loss of strength or quality.
Despite the attraction of recycling as a replacement for traditional steelmaking, recycling as a supply source remains far lower than conventional production in blast furnaces and other methods. Developing countries exhibiting the greatest steel demand growth lack the recycling centers, scrap yards, steel refineries, and specialized steel mills required for large-scale recycling activities. Additionally, the high electricity requirements of electric arc furnaces used in steel recycling compete with other consumers for electricity, driving up prices. Heavy electricity usage risks destabilizing the grid, limiting economic growth, and/or increasing electricity prices. These factors limit the scalability of electric arc furnaces.
Longer-term, the primary headwind for met coal demand stems from slowing industrialization in China. As the country’s steel production declines, India and Southeast Asia are expected to pick up the slack. Most forecasts show global demand increasing despite China’s declining demand.
Demand growth in 2026 and beyond will be attributable to continued economic growth and urbanization in India, Southeast Asia, and Africa.
According to the IEA, India’s steel production increased by 6.3% in 2024 compared to the previous year, following 12.3% growth in 2023. India aims to more than double its steel production capacity, from 141 million metric tons in 2024 to 300 million metric tons by 2030.
The following graphic illustrates the key long-term demand drivers for global met coal, including anticipated growth in blast furnace capacity in India and Southeast Asia.
Source: Core Natural Resources Investor Presentation, May 8, 2025.
The IEA expects China’s steel production to decline by approximately 5% by 2030. Given China’s 2024 production of 1.01 billion metric tons of steel, its production decline is expected to total 50 million metric tons through 2030. By the IEA’s math, India’s growth alone should offset China’s decline in steel production capacity. The analysis does not address the issue of capacity utilization.
The Near-Term Outlook is Ugly
While the long-term setup is favorable, on balance, the near-term outlook for steel—and, by extension, met coal—is ugly.