By Henry Bonner ( email@example.com) A particular type of coal - called metallurgical coal or coking coal - is used in the process of manufacturing of steel. After reaching a six-year low in its price and recent industry cutbacks to production, metallurgical coal is showing classic signs of a resource that is ready for a cyclical uptrend. Steve Yuzpe, CEO of Sprott Resource Corp., specializes in finding long-term value plays in the private equity sector. He says metallurgical coal is an out-of-favor sector, and by his estimation, it is cheap and the price is probably due to improve. In 2011, unusually heavy rainfall and flooding in Australia disrupted the production of metallurgical coal, causing the price to surge. The industry responded to higher prices by boosting their output of metallurgical coal, adding substantial production capacity. A lot of that new capacity depended on high prices to be economic, as they were brought online when metallurgical coal was over $300/tonne. Long-term observers of resource markets will guess what happened next. The production increase led to an oversupply of metallurgical coal, causing the price to plummet. From 2011 to 2014, the price of metallurgical coal fell by over 60% to $120/tonne today. At the current low price, more than half of the supply of metallurgical coal is being produced at a loss on operating costs, without accounting for exploration and development costs that must be recouped.
Source: Wood Mackenzie, Quintana Capital The industry has responded by announcing cuts to production, as lots of the new capacity has become uneconomic. The industry has announced cutbacks of over 20 million tonnes of production, representing approximately 6.5% of global exports.1 Many industry participants are being wiped out. Steve says many stocks he's been following in the sector are down over 90% since 2011. Since the 2011 peak, metallurgical coal producer Walter Energy, Inc. is down 96%2. Coal producer Arch Coal Inc. fell by around 91% in the same time period3 and another large producer, Alpha Natural Resources, Inc., fell by over 96%.4