Investing in ASX coal shares

Shares in coal companies have fallen out of favour with environmentally-conscious investors recently.

But this hasn't stopped their share prices from skyrocketing as the war in Europe and ongoing lockdowns in China have constricted supply, just as demand is picking up after the pandemic. 

What are ASX coal stocks?

ASX coal shares are companies producing coal that trade on the Australian Securities Exchange. They include mature mining companies with one or more coal mines already in operation, junior miners with projects in development, or exploration companies seeking new coal deposits.

Coal shares can be a good option for an investor seeking exposure to the coal price without actually buying the physical commodity itself. However, not all coal stocks move in perfect harmony with coal prices.

For example, a coal miner may come with its own unique risks – perhaps it is highly leveraged, or its coal mine only has a short useful life. These risk factors can often make its stock price move quite differently from the coal price.

Various ASX exchange-traded funds (ETFs) can also offer investors some exposure to coal shares (and the coal price). For example, the BetaShares Australian Resources Sector ETF (ASX: QRE) invests in the largest ASX resources companies, including BHP Group Ltd, one of Australia's biggest coal producers.

Why invest in them? 

Coal-fired power plants currently generate almost 40% of the planet's electricity. And, despite rising global efforts to transition away from fossil fuels, it is still estimated that roughly 20% of the world's electricity will come from coal by 2040.

This should mean that demand for coal will remain strong for years to come, which may keep commodity prices relatively high.

Top coal shares on the ASX

Australia is also among the largest producers of coal on the planet. This means that some of the world's largest coal mining companies trade on the ASX. This makes it especially easy for Australian investors to add some coal exposure to their portfolios.

Here are the top three ASX coal shares ranked by market capitalisation from high to low.

BHP

BHP is one of the largest mining companies in the world and one of Australia's biggest coal producers. However, over recent years, it has reduced its fossil fuel exposure, selling off several coal mining assets in Australia and Colombia.

BHP still produces large amounts of metallurgical coal from its mines in Central Queensland. Unlike thermal coal, which is used in energy production, metallurgical coal (also called 'coking coal') is used in blast furnaces to make steel.

Whitehaven

Whitehaven is a leading global producer of high-quality thermal coal, with four operational mines in New South Wales and further projects in development in both NSW and Queensland.

Whitehaven supplies many emerging economies with the coal that fires their power stations. However, it is also increasing its metallurgical coal production to meet higher demand from steelmakers.

Yancoal

Yancoal is another leading producer of thermal and metallurgical coal. It has multiple mines across Queensland and NSW, with additional exploration projects underway.

The company has also stated its intention to increase metallurgical coal production to meet the expected increase in demand from developing countries. These economies will require large quantities of steel for new infrastructure and construction projects.

Benefits of investing in coal shares

Coal is still the leading source of electricity for the planet. This means demand for coal will remain high, even as alternative sources of energy are being pursued.

Exposure to coal can also provide diversification benefits for your portfolio. For example, while the prices of most stocks have been incredibly volatile since the onset of the Russia-Ukraine conflict, the prices of many resources stocks – particularly coal miners – have surged higher on the back of skyrocketing commodity prices.

This means if you hold part of your portfolio in coal shares, you might not be performing too badly.

And the cons?

The major drawbacks to investing in coal are ethical considerations. Many investors simply do not wish to be exposed to an industry that creates so much pollution and is so damaging to the environment.

There are also the financial implications for the industry from rapidly changing government regulations. As the world increasingly transitions to renewable sources of energy, the financial incentives to mine coal will reduce. Even if commodity prices remain high, tariffs and other costs of production may increase, squeezing company profits.

How are coal shares being affected by global events?

As we've already mentioned, ASX coal shares were on a tear in 2022, mainly due to the ongoing conflict between Russia and Ukraine.

With energy supplies threatened, commodity prices soared, which sent the share prices of ASX coal mining companies rocketing. The Yancoal Australia Ltd (ASX: YAL) share price finished the year more than 133% higher, while Whitehaven Coal Ltd (ASX: WHC) surged more than 260%.

The end of the COVID-19 pandemic is also expected to drive increased demand for coal. As economies restart after years of pandemic hibernation, it is expected that demand for energy and steel will both increase.

However, the road to economic recovery following the COVID-19 pandemic has so far been a bit rockier than many people were expecting. While Russia's war in Ukraine has exacerbated this, continuing lockdowns in China are also still disrupting supply chains and creating uncertainty around energy demand.

What might the future look like for ASX coal stocks?

Looking beyond the Ukraine war and the COVID-19 pandemic, the longer-term trends for ASX coal shares are even more uncertain. 

Government regulations present a real risk to the coal industry. The costs involved in coal production may increase while demand declines, which could particularly hurt smaller miners. As the world transitions to renewable energy sources, this means global coal production might be concentrated in just a few of the largest companies.

Are ASX coal shares right for you?

Because of its importance in energy creation and steel production, coal will likely remain an in-demand commodity for years to come. This is despite global efforts to lower carbon emissions and transition to renewable energy sources.

However, there are risks to the industry. Government regulations, carbon taxes, and other financial disincentives could make survival challenging for junior and emerging coal mining companies.

Whether you choose to invest in coal miners will likely come down to your personal values. Regardless of the long-term trends for the sector, you simply may not be comfortable investing in coal miners because of how much they contribute to climate change.

However, if you do wish to diversify into coal, one or more of the companies listed in this article may be a good place to start.