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Rising supply takes edge off coking coal prices

Driven by rampant demand for steel from emerging economies and a slow recovery in Western markets after a hiccup in 2009, coking coal prices remain fairly robust. However, increasing supply and signs of weakening manufacturing activity in Europe and elsewhere could bring prices off their highs, industry chiefs told the Coaltrans World Coal Conference in Madrid.

While growth in demand over the last decade has been concentrated in the BRIC economies (Brazil, Russia, India and China), new markets are now being added to the mix. These include Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – the so-called CIVETS – and others, whose expanding middle classes are consuming more products, as well as requiring the construction of more buildings and transport infrastructure. That all means a greater need for steel and the coking coal required to produce it.

Tight coal supply – exacerbated by natural disasters, such as the floods in Queensland at the turn of the year and the Japanese tsunami in March – has helped keep the price of both metallurgical and thermal coal relatively high at a time of volatility in other commodities markets.

But an increase in coal supply could now help to soften prices. Franz Blancquaert, general manager for sourcing at ArcelorMittal, the world’s largest steel maker, expects the balance to level out. “Slowly but surely supply is increasing and soon we will be in equilibrium with demand,” he told the Coaltrans Conference.

Solid margins

Wood Mackenzie forecasts that the price of premium hard coking coal could fall from around $285/tonne now to less than $240/ton in the fourth quarter 2012. However, the energy consultancy notes in its recently published Near-Term Market Outlook, even at those levels the price would remain significantly above the marginal cost of production, while longer-term drivers still pointed to solid metallurgical coal demand in the Asia-Pacific market.

“Demand growth will be led by emerging markets with Asia accounting for 75% of global metallurgical coal demand by 2030. China and India will be key demand drivers, contributing to 60% of Asia Pacific’s total import demand,” according to Prakash Sharma, a coal market analyst at Wood Mackenzie.

That buoyant demand outlook means there is no shortage of firms in coal-rich regions eyeing up export potential. For example, US firm Patriot Coal recently said it planned to increase metallurgical coal production, on the basis that it expects prices to stay high given strong demand from Brazil, India and elsewhere, Patriot said short-term worries over a return to slower global growth was unlikely to make an impact on the met coal market.

ArcelorMittal’s Blancquaert said the amount of coking coal per ton of steel produced would continue to decline, given improvements in blast furnace injection rates using pulverised coal injection (PCI) and gas. However, any such gains will be offset by rising steel demand.

Expanding for export

Ian Kilgour, senior vice president for coal at Canadian diversified mining firm Teck told the Coaltrans conference that his company was taking advantage of the location of its mines on the western side of Canada to cater more to Asian markets. Teck has five mines producing metallurgical coal in south-eastern British Columbia and one in Alberta.

Between them the mines produce around 85% of Canadian steelmaking coal. Kilgour said Teck’s coal represented the largest single Canadian export to Japan, Korea, Taiwan, Brazil and Turkey and that it was in the middle of a programme to boost its output to 30 million tons per year from 23 million. Teck is also expanding its port capacity and improving its rail infrastructure in British Columbia to handle the increase.

On the other side of the equation in the Americas is Brazil’s Gerdau group, the region’s largest steel maker and so a key player in driving coking coal demand there. The high cost of coal and the other main input, iron ore, have been weighing on the company’s bottom line in recent months, but Gerdau’s output is rising fast, boosted by increased demand in the Brazilian domestic market and North America. In the second quarter 2011, production of raw steel rose 8 percent over the same quarter in 2011 to 5.12 million tonnes, while that of rolled steel products increased by 3 percent.

Brazil’s imports to climb

“There is a good chance that Brazil’s coking coal imports will double within nine years,” Douglas Fagundes Moreira, technical manager for solid fuels and logistics at Gerdau Açominas, told the Coaltrans conference. That would mean the country could be importing 21 million tons of coal by 2020.

At present nearly half of Brazil’s coking coal comes from the US, with much of the rest coming from Canada and Australia, but others are likely to become more important as Brazil’s needs grow. Colombia, in particular could play a greater role in the future, according to Fagundes Moreira. 

He said the expansion of Brazil’s steel sector would largely be driven by the production of slabs for export, rather than being dependent on the domestic market and one-offs such the infrastructure needs of the football World Cup in 2014 and the Olympic Games in 2016, both of which the country is hosting.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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