Macquarie Research reported in its commodities analysis that coking coal will move into surplus in the vicinity of 11 million tons in the global seaborne market as major steel production cuts kick in, with leading European steel producers ArcelorMittal and Corus dropping fourth-quarter production by 30%.
Macquarie said it appears likely that global steel production may be cut 12-15% year over year in the 2008 last quarter, “one of the largest quarterly falls ever recorded”.
“Against this background, the demand for steelmaking raw materials (scrap, coking coal and iron ore) has clearly collapsed, leading to plunging freight rates for these commodities and sharp falls in spot sales prices,” Macquarie said.
The major investment bank said steel scrap prices had fallen from the $US600-800 a tonne range to $US100-150/t over the past four months while spot iron ore prices delivered to China had fallen from $US200/t to the $US55-65 range.
While noting that coking coal prices were harder to monitor as more than 95% is sold under annual benchmark prices, Macquarie said the cuts from the European steel producers would have more effect on the coking coal market than China, which is only a minor importer of the commodity and also a net exporter of the more refined product, coke.
Meanwhile, major bank ANZ reported in its own weekly commodity update that Shanxi, China’s major coal producing province, had cut coking coal production by 10%.
The bank said coal prices over the coming months should ease in line with a lower forecasted oil price.
“Global demand conditions also appear to be faltering – more so in Europe than in Asia,” ANZ said.
“However, ongoing infrastructure constraints in Australia, the likelihood of lower exports out of China (potentially Vietnam and South Africa), and seasonally wet weather in Indonesia, is likely to slow the price decline.
“The switching of higher quality thermal coal into the higher priced semi-soft coal market should continue with price differentials widening further. Sharply falling freight rates are a warning sign that demand has fallen, although reports suggest that some of the weakness is due to tightened financing conditions.”
