Perhaps the best indicator that the coking coal market remains in substantial deficit is that the Japanese steel mills are still buying coal from the United States at very high prices. The United States exported 2.88 Mt of metallurgical coal to Japan last year at an average FAS price of US$98.14, which at prevailing high ocean freight rates ends up at around US$155/t CIF Japan.
Not surprisingly, this corresponds reasonably well with the new Australian JFY 2005 contract price for hard coking coal of US$125/t FOB, after making allowance for the ocean freight rate differential.
It is certainly worth keeping an eye on the average price of Japanese coking coal imports from Japan, as it will fall substantially if the supply deficit starts to ease. There is no sign in the trade data that this is happening yet, but the Arcelor steel production cutbacks are the first negative signs in what has been a relentlessly strong steel market over the past year and a half.
Arcelor notes “The apparent demand of Flat Carbon Steel in the European Union shows today a decrease of 14% due to the high level of inventories, imports and the softening of real consumption at customer base.”
In order to re-balance supply to the lower demand, Arcelor’s flat carbon division has decided to accelerate production cuts in Northern, Central and Southern Europe. Steel production for the first half of 2005 is to be cut by roughly 1 Mt through the following measures.
- Idling a blast furnace in Stahlwerke Bremen,
- Lower output at the hot phase in Cockerill Sambre,
- Reduced production of hot rolled coils at the ACB plant in Viscaya,
- A prolonged standstill of a blast furnace of EKO Stahl.
Arcelor says it will maintain the lower production levels until apparent demand comes back to normal. The latest production cuts are against a backdrop of Arcelor’s strategic plan to progressively reduce European production while increasing capacity in other countries, such as Brazil and India, where production costs are lower and environmental constraints are not as stringent.
Pig iron production by the major coking coal importing countries has slowed this year according to IISI data. The raw data shows a 1% fall in production for the first two months of the year, although it is noted that after adjusting for the extra day in February last year there was actually a slight increase in pig iron production of 0.5% this year.
Steel demand outside of Europe remains strong so it appears premature to call an end to the steel boom just yet. Much will depend on Chinese domestic steel demand, which has been growing at a far slower rate than steel production, transmuting China from being a net steel importer to a net steel exporter since around the middle of last year.
Turning to the steam coal market, spot prices out of Newcastle rebounded to US$52.10/t in mid March, while Richards Bay spot prices recovered quite strongly to US$45.60/t due to cold weather in Europe in early spring and nuclear outages in Spain.
There have recently been a number of swap deals for on globalCOAL for 2007 completion at US$ 45-46/t, so market participants are expecting a fairly orderly price decline over the next two years. Annual price negotiations between Japanese utilities and their Australian suppliers are nearly complete following Tohoku settling most of its contracts at between US$52.0 and US$52.50/t.
