A new coal supply analysis by Sydney based AME Mineral Economics outlines the crisis in which the international coking coal market is in this year, with prices hitting 22-year highs.
According to AME, the situation led to “last month’s bizarre threat from the European Union to lodge a complaint against China in the World Trade Organization – not for dumping, but for not exporting enough met coke and holding production for its own domestic use. And the Chinese government has buckled!”
Following a fall of about 10% in 2003, metallurgical coal contract prices have leapt by 20-40% this year.
AME said the price for BHP Billiton Mitsubishi Alliance’s (BMA) Goonyella brand hard coking coal increased from US$46.20/t FOB in Japan and other markets, to US$58/t (up 26%). Increases for other hard coking coal brands varied between 16% and 32%. FOB prices for semi-soft coking and PCI coals jumped approximately 42%, to US$40-46/t for semi-soft coking and high volatile PCI brands, and US$45.50-47.00/t for low volatile PCI coal.
“One feature of the 2004 hard and semi-soft coking coal fixtures was the introduction of price formulas and indexation into contracts, for periods of up to five years. A 15-year contract has also been settled between Rio Tinto and Nippon Steel for the supply of Hail Creek coking coal,” AME said.
The outlook is bullish for hard coking coal and low volatile PCI through to 2006-07 with demand driven by strong global growth in pig iron production, particularly in traditional markets such as Brazil and India, an emerging Chinese demand surge for imported hard coking coal, and cutbacks in China’s coke exports.
AME predicts that additional hard coking and low volatile PCI coal export supply capacity through to 2007 – generated from nine or ten new mines and brownfield expansions in Australia and Canada – will barely keep in step with incremental demand. Russian exports are forecast to reduce, as domestic steel mill investment in existing export mines and increasing domestic demand take effect. China, which has transformed into a net importer of hard coking coal in 2004, will stay that way for the remainder of the decade.
AME said the international hard coking coal supply “wild card” is the USA. “It is conceivable that the US will once again become a swing producer by lifting hard coking coal exports in a relatively short period from 2003’s level of 20Mtpy to 25-30Mtpy. This can be achieved by substitution – replacement of domestic thermal sales with either lower grade local thermal coal, or thermal coal imported from countries such as Colombia, and modest brownfield expansions – including the restarting of small, mothballed mines.”
Average US FOB cash costs are now on the same footing as their Canadian counterparts, and in the current higher ocean freight rate regime, the US has the lowest CFR cash cost into Europe and Brazil. US suppliers have reportedly sold 5Mt of hard coking coal to Japanese Mills for delivery in April-September 2004, with several imminent shipments to India. First quarter US exports have already reached an annualized 25Mtpy, and if even only an additional 10Mtpy of hard coking coal is exported, then current market bullishness would evaporate rapidly.
AME expects semisoft coking coal and high volatile PCI market to remain muted in the medium term. As a result of the later timing of thermal coal settlements, a high proportion of thermal contract settlements are at higher prices than semi-soft coking coal sales. Additionally, the medium-term need by consumers to maximise coke battery and blast furnace output efficiencies, and to minimise energy consumption, outweighs the relative economic advantages of lower-priced raw material utilization.
“Hard coking coal supply shortages, and the implosion of Chinese semisoft/ PCI coal exports in late 2003 and 2004, have restored market buoyancy, but this is likely to be short-lived. A forecast surge of Chinese exports in 2006-07, and additional capacity generated from seven new Australian mines in the same period, have the potential to create a semi-soft coking coal supply surplus.”
China has a significant average FOB and CFR cash cost advantage over Australian and potential Canadian semi-soft coking/high volatile PCI suppliers in Asian markets. A future domestic downturn could see low cost Chinese exports surge, at the expense of their higher cost competitors. Foreign investment in dedicated export mine projects may ultimately result in a significant increase in Chinese semi-soft coking/PCI coal exports.
Chinese coal coke exports are another metallurgical coal market “wild card”. An implosion of Chinese coke exports in 2004, to an estimated half of 2003’s 14.7Mt, has contributed to the change in market dynamics. The loss of about 6-7Mt of coke to the international market has the potential to increase international metallurgical coal consumption outside of China by up to 10Mt.
The number of new coke ovens under construction in China early this year was reported at more than 180, with a combined capacity of over 65Mt. Even if Chinese blast furnace (pig) iron production increases from 202Mt in 2003 to about 267Mt in 2005 (AME’s current forecast), and Shanxi Province makes good on its earlier stated intention to close down its remaining beehive ovens in 2004, the additional coke-making capacity appears to be well in excess of domestic coke demand. Such potential overcapacity could lead to another surge of Chinese coke exports around late 2005-06, which would impact negatively on international metallurgical coal demand.
AME forecasts that:
- Spot prices for semi-soft coking and PCI coal should ease by the second half of the year, but the market for spot hard coking coal should remain strong through 2005.
- Long-term contract prices for hard coking coal will increase again next year, both in nominal and real terms, but then decline in real terms through to 2009.
- Long-term contract prices for semi-soft coking coal will fall in real terms from 2005 onward, while low volatile PCI coal real prices will decline at a slower rate beyond 2006.
