In a recent client note Macquarie Wealth Management took stock of the job-costing metallurgical coal production curtailments announced by Peabody – its North Goonyella mine cuts – Glencore, Teck Resources and Solid Energy plus the US shutdowns by Alpha Natural Resources, Murray Energy and Rhino Resource Partners.
The broker said those moves all reflected the steep decline in prices this year with Australia exported spot premium HCC prices down 21% year to date to $88/t free on board, as of June 5.
“When Teck made its announcement, its CEO stated that the seaborne industry needed to cut 45 million tonnes of production to move back into balance, while industry consultant Wood Mackenzie estimates HCC oversupply of 27mt,” MWM said.
“We agree more with the former than the latter and will outline in this piece how we think about met coal oversupply. We expect more cuts to materialise over the next few months and think pressure will build further once the 3Q15 contract almost inevitably settles much lower quarter-on-quarter – we expect $95/t in 3Q versus $109.50/t in 2Q, basis FOB Australia.”
This forecast was based on the broker’s observation that the premium HCC benchmark contract had settled $7/t higher than the spot price over the past four quarters.
However, there could be more risks to the downside.
“It has been reported that with negotiations underway, there has been an early offer of $92/t,” MWM said.
The broker further said oversupply was one of the met coal market’s two major problems.
“The other has been substantial cost deflation, driven by active cost cutting, lower oil prices and dollar strength,” it said.
“Barring a large reversal in the oil and foreign exchange markets, we think the best case scenario for US dollar [based] met coal prices is a gradual recovery from next year, not least so that idled capacity doesn’t return any time soon.”
Bloomberg Intelligence analysts have forecast the premium HCC price to settle close to $94/t with this based assumptions relating to average spot prices of the previous quarter as opposed to existing spot prices.
“Settlements from 2Q14 to 1Q15 carried a premium of $4 to $5 a metric ton above the prior quarter's average spot quote,” the Bloomberg analysts said.
“Based on the $90.24 average in 2Q, this implies a figure slightly higher than $94. More production cuts are likely to ensue with the benchmark at these levels.”
