Matt Warder

The coal bull case on Twitter right now: Hormuz chokes LNG, JKM rips, so Newcastle has to follow. The two do move together over the long run, with an r of 0.84 on price levels. Month to month, gas explains about 14% of what coal does. A month ahead it's 6%, and two months ahead it's nothing. My read is that they move together because the same shocks hit both: oil, freight, weather, recessions and wars. A small pool of plants in Japan, Korea, Taiwan and Europe can switch from gas to coal when gas gets expensive, but that capacity fills up quickly. Coal has been cheaper per unit of energy than Asian LNG in 113 of the last 117 months, before accounting for plant efficiencies, so price isn't really the constraint. Capacity is. Korea caps coal generation and idles units during fine dust season, while Japan's efficiency rules push older units out. In March both lifted those limits: Korea dropped its 80% cap on coal generation and Japan suspended its efficiency caps for a year. Hormuz is a pure gas shock, since no coal passes through it. NEWC was up 23% in March as restrictions were lifted and switchable plants came online but there has been little movement since. Gas has since risen more than 50%, while coal is up only about 6%. On another note, El Niño is hard to call. A drier India means less hydro and more coal burn, which is bullish. A dry Indonesia means low river levels in Kalimantan, so the barges that carry coal to the ports run light or stop, which is also bullish. China probably goes the other way. El Niño tends to bring a milder winter in the north and more rain in the south, so less heating demand and more hydro, which is bearish. And some of coal's best years came in La Niña, when Australia turned into a swimming pool. La Niña flooded the Hunter and Bowen Basin in 2022, which is part of how Newcastle got to $400. El Niño usually means a dry eastern Australia, so Australian supply should run fine. Two bullish channels and two bearish, among a very, very long list of stuff I haven't considered. We're now through shoulder season, so the next few months get interesting. I think coal can still run, but it'll be on India's stockpiles, Chinese domestic supply and Indonesian exports, not gas. Trading Newcastle off JKM doesn't reflect the market right now if you ask me, but happy to be corrected. Hard to be bearish the equities though. Thungela at a 19% FCF yield and Yancoal at 13% are pricing Newcastle rolling over from here, and I don't see why it should. What I find strange is that the market priced the war shock in March, coal and the stocks both jumped, and the stocks have since given it back. Yancoal is down 27% from March, even though the shock is still running and Newcastle is higher than it was then.