Coking coal comes face to face with oversupply

The coking coal market is currently oversupplied and prices are poised for further declines. Despite this, a variety of new projects and expansions will continue to swell global supply for the foreseeable future, although the largest new tonnages will not make their appearance until the next decade. Australia and China remain the keys to supply and demand respectively.

“There is an oversupply. If Australia comes back to the sort of levels it was doing in the first half of 2010, another 30 million tonnes will come onto a very balanced market,” Gerard McCloskey of McCloskey Group said this week in a presentation at the annual Investing in African Mining Indaba conference in Cape Town, South Africa.

Prices will fall, he said, but will remain at pretty decent levels that are likely to be well above producer costs.

“Whatever happens to prices in next quarter … you’ll have seen the longest period with coking coal above $200 (per tonne) – eight quarters,” McCloskey said. During that time, he added, price volatility has been “extraordinary,” with prices hitting as much as $330 in the second quarter of 2011, before falling back to $235 in the current quarter.

“There will be a correction of prices down towards $200,” McCloskey predicted. “It’s a great price. Until two years ago we had not had prices above $200 except for one brief period in 2008.”

Despite the price decline, there is still a gap between spot prices for hot rolled steel coil (band) and hard coking coal settlement prices.

“You can charge anything you like for your coking coal,” McCloskey said, “but if hot rolled coil is still at these levels – probably a bit lower than $600 (per tonne) now – it is really not sustainable with prices at these levels. It’s one of the reasons I believe hard coking coal prices will come down,” he added.

Additional supply meanwhile is coming from Australia, which is just getting back to normality following last year’s extensive flooding in Queensland, the country’s major coal producing region. Australian producers are in the process of adding another 30 million tonnes to a hard coking coal market that is probably only about 140 million tonnes, McCloskey said.

Fortunately for coking coal producers, China returned to the market last year. The pace of imports was somewhat slow in the first half but fairly strong in the second half. But an increasing portion of China’s imports – as much as half – is now coming from producers in neighboring Mongolia.

“I believe that China is fundamentally short of high-quality coking coal reserves,” McCloskey said. He cited a big increase in China’s coke consumption rate last year, as well as an increase in coking coal, which he said helped him to conclude that “the coke is getting poorer because the (Chinese) coking coal is getting poorer.”

Although many industry observers are assuming that most or all of Mongolia’s coking coal production will find its way to China, McCloskey said, he differed with that opinion.

“I have already seen one cargo (of Mongolian coking coal) go all the way up into Russia,” he said, adding that Japanese interests are also getting involved in the land-locked country. “I think we will see Mongolian coal reach the sea. … I think it will go to more markets,” he said.

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