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.
China remains the key to iron ore demand, in part because demand in other markets is weak, especially in Europe.
If all but one European steelmaker (Arcelor Mittal) closed down, there would still be 14% overcapacity in the regional market, McCloskey said, citing a recent Arcelor Mittal briefing. He added: “The demand in Spain in one year went from 8 million tonnes to 2 million tonnes.”
The picture is not good for the US market either, in McCloskey’s opinion.
“We’ve suddenly seen a weakening in the market, which has seen US coking coal as well as steam coal closures,” McCloskey said. US producers in recent years had begun exporting to Asia, he continued but added: “Now there are vessels standing off China (with cargoes) of US coking coal that are unsold.”
McCloskey estimates that in the Appalachian coal mining region of the United States, some 20-40 million tonnes of coking coal production is going to disappear.
Despite the looming oversupply picture, many new players are waiting in the wings. Projects are in various stages of development in regions as varied as Mongolia, Indonesia, Mozambique, Russia and Canada. The volumes these projects are likely to produce are expected to be relatively modest, and much of it will not be a factor until the next decade, McCloskey said. In the current decade, however, new production from projects in Mozambique and Canada will likely add another 110-112 million tones to the market.
Australia is likely to continue to dominate the industry, however, with the biggest developments to come in Queensland, McCloskey said. He indicated that, while major producers are not likely to launch new coking coal operations if they think it would disrupt the market, a number of projects are already in progress.
BHP Billiton has green-field and brown-field projects that could add 42 million and 19 million tonnes to supply respectively between 2015 and 2020. Other advanced projects in Australia could add an additional 51 million tonnes during the same time frame, he noted.
McCloskey also briefly summarized his views on the steam coal market, which he said looked fairly weak for many producers, such as those in South Africa. India is going to buy less steam coal, he said, while producers in Colombia will be exporting more to Europe. Demand is falling in the US market, where producers also will be trying to export more tonnage to Europe. Producers in Indonesia and Australia also are expected to churn out higher volumes.
Another significant factor is the “absolute collapse of the internal market in the US, which knocks on to the international market. The crossover price between coal and natural gas is thought to be around $4.50/ million BTUs of gas. It’s now $2, and it’s February,” traditionally the period of highest demand in the US market, McCloskey said. “It’s devastating for the coal industry. I expect you’ll see closures and mergers, with 100 million tonnes disappearing from production. … You’ll get an increase in exports because it’s got nowhere else to go,” he added.
Chris Munford researches and writes about commodities, with an emphasis on steel raw materials and energy. He is based in the New York area.