As the finance world continues to clamp down on coal producers over climate change concerns, producers focused on metallurgical coal used in steelmaking are pushing to stand out from peers mining coal used to generate electricity.
Financial institutions and other corporations are increasingly answering public demand for investment screening covering environmental, social and governance concerns. The carbon-intensive thermal coal sector is particularly vulnerable to initiatives acting on climate change, having already been weakened in many regions by competitive renewable energy and natural gas resources.
While many investors may continue to turn away anything to do with the word "coal," some may dig further and look for opportunities in the space. Some companies will be able to distinguish themselves from peers, but all coal producers are "swimming upstream" as ESG focus intensifies, said Benjamin Nelson, senior credit officer and lead coal analyst at Moody's.
While producing steel is still relatively carbon-intensive across the supply chain, producers of metallurgical coal are increasingly looking to highlight that the commodity may not be as replaceable as thermal coal, after a few years of big divestment announcements from banks, insurance companies and asset managers.
"Unlike other coal companies, we do not produce thermal coal, which is used for power generation," Warrior Met Coal Inc. CEO Walter Scheller said in a recent sustainability report highlighting the pure-play metallurgical coal producer's ESG efforts. "It is important to understand that, in general, the environmental impact of met coal is far less than that of thermal coal."
Metallurgical coal forms a relatively small portion of the wider coal sector in terms of volume, even in the U.S., a significant global supplier. However, it can often fetch much larger margins than the thermal coal sold to power plants. While many companies mine significant quantities of both types of coal, such as Peabody Energy Corp., several U.S. coal producers focus on one or the other.
In its report, Warrior said it is working to reduce greenhouse gas emissions because it recognizes the "scientific reality" that human activity is contributing to climate change. Those looking to get rid of coal may have a clear path to eliminate it from power generation, but not as a raw material for making steel at a large scale, Warrior wrote in its report.
"There are many more environmentally-friendly, renewable alternatives to using thermal coal for power and heat generation, such as natural gas, nuclear, solar or wind," the company stated. "The high-quality met coal we produce, on the other hand, is currently irreplaceable in the steelmaking process."
Many investors are making the same distinction. When asset managing giant BlackRock Inc. rolled out a landmark policy to exclude coal from its active funds, it specifically targeted thermal coal. Ramaco Resources Inc. Executive Chairman Randall Atkins said in a January interview that investors might have a difficult time sorting through larger, diversified producers like Peabody when trying to determine their exposure to thermal and metallurgical coal market dynamics.
"Thermal coal has a lot of headwinds right now, aside from ESG, but also from a market standpoint, given the contraction of thermal demand brought on by a combination of natural gas and plant retirements," Atkins said. "Ramaco, hopefully, is able to distinguish itself as it always has as a sort of pure-play met play. ... Overall the market, as it goes along, will sort of self-select between met and thermal producers."
Ramaco CFO Jeremy Sussman recently spoke on a panel at the CoalTrans 2020 conference about coal's role in a world increasingly turning to ESG investing. The company emphasizes its role as a pure-play metallurgical coal producer in discussions with banks, he said. Such companies would like to be more aligned with the steel supply chain in investors' minds.
"Any publicly traded steel producer in the U.S. has all the bulge bracket, largest investment banks basically jumping over one another to lend them money," Sussman said, highlighting the sometimes very different sentiment for the metallurgical coal producers providing raw materials.
Thermal coal producers are noticing the investment sentiment as well. Noting the company's ESG efforts beyond carbon dioxide emissions, Consol Energy Inc. President and CEO Jimmy Brock recently said it is easier for metallurgical coal producers to pitch to ESG investors.
"I mean, it has different characteristics and properties that can't be substituted," Brock said of metallurgical coal at the CoalTrans conference. "When you look at the thermal side of the business, I think it's pretty easy for them to criticize [rather] than come on board."
The last six months have been "quite intense" in terms of ESG, Teck Resources Ltd. President and CEO Donald Lindsay said at a Jan. 29 investor conference. The company mines only a small amount of thermal coal, and Lindsay noted that BlackRock, a top-five shareholder in the company, would not be divesting from Teck under the policy.
"We have coal, and we have oil, but the distinction is, we have the good coal, not the bad coal," Lindsay said. "I'd love to change the name of steelmaking coal to something else so that people could understand that it's entirely different."