Australian inventories of export coal jumped from 14Mt at the end of August to 15Mt at the end of September, with metallurgical coal stocks up 0.8Mt to 7.1Mt and energy coal up 0.2Mt to 7.9Mt. Furthermore, Fording of Canada has again downgraded its coking coal sales forecast for the year and BHPB coking coal sales are down.
Throughout the last round of prolonged coking coal negotiations the Japanese steel mills were vehement in their position that coking coal supply was not as tight as producers cracked up, at least in the Pacific market. Armed with the latest data they will surely go into the upcoming round of annual negotiations, starting in November, with a similar stance.
But it is important to recognise that overcapacity in the coking coal sector is nothing new. Readers will remember our numerous discussions over the past year outlining spare/latent capacity at the mines of the two largest coking coal exporters, BHPB and Fording. It is not overcapacity per se that drives down prices, it is overproduction, and BHPB and Fording have been very disciplined in this regard over the past year or so.
Smaller coking coal producers may well say, with their hands on their hearts, that they can sell all of the coking coal that they can produce, and more, but this is only courtesy of the discipline of the ‘big two’ producers.
The takeover bid for Fording by Sherritt should therefore be of considerable concern to BHPB and to other coking coal exporters. BHPB and Fording have developed very close relationships over the years that have reinforced the disciplined marketing approach both have taken. There is little real evidence to suggest that Sherritt would show less market discipline if its bid is successful, but there is the sneaking feeling that Sherritt would prioritise short term profits to reduce debts and to show its shareholders just what a clever buy it had made.
It would therefore not surprise if BHPB puts in a counter bid for Fording, that is if it thinks it can get the deal past the competition watchdogs, in the EU in particular. If any company other than BHP picks up Fording it will certainly create additional uncertainty regarding future hard coking coal prices.
The best endeavours of BHPB and Fording to sustain hard coking coal prices have been put under pressure by strangely subdued global imports this year – a weakness not limited to hard coking coal but extending to metallurgical coal imports as a whole. As discussed last month, we attribute this weakness to a rundown in consumer metallurgical coal inventories. It is difficult to come to any other conclusion, given that blast furnace iron production is up in countries that import metallurgical coal.
Hard coking coal is also, of course, suffering from its increased price relative to other forms of metallurgical coal. Prices in recent annual coking coal tenders by the Turkish integrated steel producer, Erdemir, have been reported as being in the US$52 – 54/t range CIF. This would translate back to around US$42/t FOB Australia, or US$6 below the current Goonyella reference price of US$48.35/t FOB. We have not yet been able to confirm the Turkish tender prices yet, but will keep you posted. It is likely that there are some lower quality blends involved, but if the prices are correct it would still represent a substantial weakening of hard coking coal prices.
We still expect the hard coking coal market to firm somewhat over the next few months as consumer inventory reductions reach a natural end point. But it is difficult to see hard coking coal maintaining its current record premium over semi-soft/PCI coal over the medium term. With steam coal contract prices likely to fall again next year, at least in Japan, the signs are also pointing to a hard coking coal price reduction next year.
As forecast, steam coal spot prices remained almost static through October following the steep increases recorded during September. Newcastle spot prices traded in a narrow range between US$23.9 and US$24.50/t FOB throughout October. Richards Bay prices similarly remained between US$26.4 and US$26.7/t through the month.
On globalCoal trade was thin, spreads between bids and offers generally were wide, and the forward curves were flat. Buyers and sellers are battling each other to set the direction of the next price move and something of a Mexican standoff has developed.
Perceptions that Chinese exporters would re-enter the market with a vengeance when spot prices increased to the equivalent of US$24-25/t FOB Newcastle have proven correct. Chinese coal exports jumped to 9.04 Mt in September, up 6% y-o-y and Shenhua has been successful in numerous recent tenders. This has put a cap on steam coal spot prices in the Pacific.
The ever-worsening problems in the Japanese nuclear industry, which have forced mass shutdowns of Tokyo Electric nuclear units, are likely to result in a rundown of excess producer inventories of steam coal over the next few months. Our forecast end of year spot prices remain at US$24.5/t FOB Newcastle and US$27.50/t FOB Richards Bay.
It seems bizarre that even now some annual price negotiations for the current year remain incomplete. But the Korean utilities, other than Korea Southern Power (KOSPO), which settled last month at US$25/t FOB Australia, have finally agreed on a ‘provisional’ price of US$25/t FOB pending further negotiations. Word is that the ‘further negotiations’ will never take place, with the provisional price likely to remain in effect through until the end of this year when most contracts with Australian coal suppliers expire anyway.
With the Japanese ‘reference price’ system likely to disappear this year or next, we will instead be basing our steam coal price forecasts on average Australian export steam coal prices from now on. Our forecast for next year is for a fall of 7%.
