AME said coking coal prices hit 22-year highs after price increases of between 20% and 40% for the Japanese fiscal year commencing 1 April 2004 were agreed between major Australian and Canadian metallurgical coal exporters and steel companies in Japan, India, Brazil and other markets. Annual contract price increases of this magnitude have not been seen since 1974-75 in the wake of the first global oil price shock.
AME believes the crisis in seaborne metallurgical coal supply has been brought about by China’s transformation into a net hard coking coal importer and its unexpected failure to deliver contracted metallurgical coal tonnages late in 2003. This, along with cut-backs in Russian exports and tightening supply and rocketing prices of merchant coke, led to the supply crisis.
The falling value of the US dollar is largely to blame for an 18% increase in average hard coking cash cost of Western World exporters between 2001 and 2003 to US$30.50/t FOB.
AME’s analysis shows that this year’s forecast marginal productivity improvements will be more than offset by the effect of appreciating exchange rates, resulting in further average cost increases of 2.8% and 3.8% respectively.
If the Australian dollar escalates from the recent rate of 78 cents to the US dollar to 85 cents then 2004 FOB cost increases for hard and semi-coking/PCI coals will wipe out at least half of the price gains. Australian hard coking coal cash costs will still be US$8/t cheaper than their Canadian counterparts, but surprisingly only US$3/t lower than USA mine costs. The cost gap between Chinese and Australian semi-coking/PCI coal mine costs will widen from US$2/t in 2003 to more than US$7/t.
At present, Canadian hard coking coal cash costs are approximately 30% higher than in Australia, related to high haulage and freight charges. Consolidation of Canada’s metallurgical coal assets into the Elk Valley Coal Partnership has allowed some synergies and savings, but these have been insufficient to contain costs which are now close to US levels and about US$10/t higher than Australia’s. Canadian cost structures now place producers at a C&F cost disadvantage to US exports into Atlantic markets.
If the Canadian dollar rises to 85 cents then Canadian hard coking coal mine costs will be US$5/t higher than USA costs. Canadian semi-coking/PCI mine costs will be US$20/t higher than (i.e. double) Chinese levels, and US$12/t higher than Australian costs.
AME said mining partners BHP Billiton and Mitsubishi Development (BMA) dominated the low cost end of the hard coking coal cost curve with interests in eight Queensland mines. Xstrata’s former MIM mines experienced a 35% increase in average costs in 2003, and now sit in the third cost quartile, AME said, while Canadian mines grouped under the Elk Valley Coal Partnership dominate the high-cost end of the curve.
For semicoking/PCI coal BHP Billiton’s mines are positioned in the first quartile, while China’s Yanzhou Coal Mining (the second largest exporter of semi-coking and PCI coals), Rio Tinto, and Anglo American are also placed in the lower half of the cost curve.
Total world exports of hard coking coal are forecast to increase by more than 4% this year to approximately 140Mt, with the top eight producers controlling approximately 60% of international trade. BMA and the Elk Valley Coal Partnership (Teck Cominco/Fording Coal Trust) will continue to dominate hard coking coal export production for the foreseeable future.
AME predicts tight supply for several years. Exports from new mines and development projects in 2004-2008 such as Hail Creek, Grasstrees, Broadmeadow, Grande Cache, Cheviot, and Wolverine are forecast to barely keep ahead of demand, which will result in hard coking prices remaining strong until at least 2007.
“The recent fundamental changes in global market dynamics and cost structures may lead to the US once again emerging as a swing producer. Who would have thought that US hard coking coal producers would re-enter the Asian market this year at prices ranging as high as US$100- 130/tonne CIF?” AME said.
The average landed cost of metallurgical coals into Asian, European and South American destinations (US$/t, C&F cash basis) have increased due to higher ocean freight costs. The result is that Canada now has higher landed costs than the USA for hard coking coal supply to Europe. Australian coal is still cheaper than US product into Europe, but the approximate landed cost gap narrowed from US$11/t in 2002 to US$5/t last year. Indonesian and South American PCI and semi-coking coals have replaced South African supply as the products with lowest landed cost in European markets. Chinese and Indonesian metallurgical coal exporters improved their competitive margin in Asian markets over Australian and South African suppliers.
AME’s new report Export Metallurgical Coal 2004 – Mine Costs 2000-2008 evaluates FOB and C&F cash costs of major metallurgical coal export mines for the period 2000-2008, and covers 115 mines in Australia, Indonesia, China, South Africa, Canada, the United States, Colombia and Venezuela. These mines account for 80% of the estimated world export trade in 2003. The compilation ranks companies by cost efficiency and also compares relative costs of production by country in two categories of metallurgical coal quality – hard coking coal and semi-coking/PCI coal.
