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.