Although current supply deficits for both steam coal and hard coking coal are expected to evaporate next year, it is looking increasingly likely that markets will remain tight over the next few months as annual Japanese contract prices are negotiated.

Coking coal:

The coking coal market continues to strengthen, prompting a substantial upward revision in our price forecast for Goonyella brand hard coking coal to US$52.00/t FOB for JFY2004, an increase of US$5.75/t (12.4%) from ca. US$46.25/t in JFY2003.

The expected easing of the hard coking coal supply deficit has not yet eventuated, but the market is still expected to return to balance in 2004. The outlook for hard coking coal demand next year looks bullish, with strong steel demand appearing set to continue through 2004. But coke oven capacity constraints are likely to limit the upside in coking coal demand. It is reasonable to assume that, at current coke prices, coke ovens around the world are already operating flat out.

Average world coke oven capacity may increase by a whisker next year but the outlook for coke oven capacity over the following four years is as flat as a pancake.

Leaving China aside, it is hard to see the worlds coke producers squeezing more than a couple of million additional tonnes of coking coal through the available coke ovens next year, and of course not all of that would be hard coking coal. Ah! But the ratio of hard coking coal will be boosted to improve the quality of the coke produced I hear you say. Too true, but PCI rates will also continue to be maximised to reduce blast furnace coke rates.

It certainly looks like 2004 will be another good year for exporters of low volatile PCI coal, which is particularly prized for its high coke replacement ratio in times when coke and hard coking coal are scarce. All in all it is difficult to see how consumption of imported hard coking coal, again leaving aside China, could increase by more than about 1.5Mt next year.

There is certainly a very large current deficit in hard coking coal supply to make up. The quantum of this deficit is difficult to determine accurately, but my guesstimate is around 3 Mtpy.

Added to that we have the China phenomenon, with seemingly insatiable steel demand not being matched by growth in domestic hard coking coal production. Chinese hard coking coal reserves are relatively sparse compared with its huge reserves of other types of coal, although Shenhua is looking at developing a large coking coal deposit in neighbouring Mongolia.

Chinese hard coking coal imports have become an increasing factor in the market this year. Imports of metallurgical coal (mainly hard coking coal) to September were 1.599Mt compared with only 0.214Mt in the equivalent period of 2002. Chinese imports of hard coking coal are likely to hit 2Mt this year and are forecast to reach 4.5Mt next year.

Adding up the above demand side increments, the estimated 3Mt current deficit, an increase in Chinese hard coking coal imports of 2.5Mt and an increase in the rest of the worlds imports of about 1.4Mt we are looking at a requirement for exporters to supply an additional 6.9Mt of hard coking coal next year. Quite a boost for this traditionally low growth market.

The supply side of the equation is dominated by Australia, Canada and the United States, which together provide 90% of the world’s 115 Mtpy seaborne hard coking coal exports.

Readers will remember from the September issue of Coal Trade that we forecast flat Canadian metallurgical coal exports next year, then an increase of 0.8 Mt in 2005 (of which about 95% is hard coking coal). These forecasts are now perhaps looking a little conservative, but let’s stick with them for now.

US coal hard coking coal exporters have received a huge boost in competitiveness into the European market by the falling US dollar and the surge in ocean freight rates. Their ability to take advantage of this boost is constrained by mining problems and the poor mining parameters of remaining Appalachian coal reserves. But it is hard to see the US hard coking coal exporters, who are likely to get a US$15/t FOB or so price increase into Europe next year, not throwing a bit of money at their problematic mines to boost production, at least temporarily. Consequently, US hard coking coal exports are expected to increase by 0.5Mt next year and a similar amount in 2005.

But it is Australia that will supply the major increments in hard coking coal exports next year.

Top of the list of course is Rio Tinto’s new Hail Creek mine in Queensland. Depending who you talk to at Pacific Coal, Hail Creek exports will be 700,000t–1Mt this year and next year they will be 4.3Mt-5Mt. Let’s say an increment of 3.6Mtpy for next year. In NSW, Austral Coal is set to commission its new high capacity LW in Tahmoor North next year which should see an increase in hard coking coal exports of 900,000t–1Mt in calendar 2004 and a further 300,000t-400,000t in calendar 2005.

Oaky Creek, Crinum and Kestrel are looking forward to a better 2004 after mining conditions constrained output this year. The degree of recovery in the performance of these Queensland longwall mines is difficult to predict, but lets assume these mines export another 1.5Mt of hard coking coal next year.

The BMA is joining the party with contract prestripping operations being increased to utilize spare washery capacity. As a bare minimum the BMA will export another 500,0000t next year and other Australian hard coking coal mines such as Curragh, Metropolitan, Collinsville etc could chip in another half million tonnes.

All up this would give us an additional 7Mt of Australian hard coking coal exports to add to the additional 500,000t of additional US exports. So what do we end up with – a 600,000t surplus in hard coking coal supply next year. A balanced market given the inherent level of inaccuracy involved.

But Japanese hard coking coal prices are being settled next month rather than mid next year (hopefully) so the current sellers market will dominate proceedings. Both of the major hard coking coal exporting countries, Australia and Canada, have been hit by strengthening currencies, and neither has been advantaged with respect to the other by freight rates into East Asia. So both will be looking to regain some of the profit margins lost through the fall of the greenback.

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