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Coaltrans China - Who has the advantage in supplying China's coking coal demand?

It is believed that China's coking coal import demand has potential for a steady growth in the long term. Speakers at the 12th Coaltrans China Conference looked at how international suppliers could share the pie from this growing market.

It is believed that China's coking coal import demand has potential for a steady growth in the long term. Speakers at the 12th Coaltrans China Conference looked at how international suppliers could share the pie from this growing market.

 

"China's demand for coking coal import will have a steady increase in the long term. Chinese importers will partner with suppliers in a more rational and integrated way,” said Sun Yuefeng, Chief Manager of Department of Coal Resources at Sinosteel Raw Materials and a panel speaker at the Conference in Shanghai.

                                                    

With China's environmental protection policies further tightened up, the demand for low sulphur and low ash coking coal tends to grow larger. China's coking coal import has maintained a strong increase in the last few years, up from 38 million tons in 2009 to the “historical high” of 70 million tons in 2013. However, China's washed coking coal production was 500 million tons, which means that imported coal only accounted for 14% of the total domestic supply.

 

"That is to say close to 90% of China's coking coal demand is satisfied by domestic supply. So price is an overwhelmingly important factor affecting the quantity of the import," said Sun.

 

Speaking at the same session, Ian Roper, Commodities Strategist of CLSA Asia Pacific Markets said that coking coal prices have disappointed many.

 

"Last year, we have seen prices went down significantly into the cost curve. It is primarily due to a lack of supply disruption, a lack of producer discipline and weak international demand," said Roper.

 

"Cost cutting has been a major theme among producers, but we believe that this has only reduced the total cost curve helping to contribute to lower prices," he said.

 

Australia

Australia is a clear winner in the cost-cutting competition, according to Roper, with metallurgical coal exported to China up 25 million tons in 2013, while Canada and Russia rising five million tons. The highest cost suppliers, the US and Mongolia, only dropped out three to four million tons each.

 

But Australia is also aided by its weaker currency and a lack of supply disruption, which allowed volume maximisation to reduce costs on a per-tonne basis. Australia will continue to be the dominant supplier of metallurgical coal, in particular, from Queensland. Main producers include Rio Tinto, Glencore Xstrata, Anglo American and BHP Billiton.

 

Russia

Russia benefits from its closer location to China, enabling the commodity to arrive at China's major harbour cities efficiently and at lower costs. Additionally, most of Russia’s coking coal is low in sulphur, and in some cases even lower than the majority of Australian coking coal. The distinctive quality of Russian coal facilitates coal blending.

 

United States

Sun Yuefeng believes domestic US coal demand is likely to reduce in light of the government's favorable policy towards further exploration of new energy such as shale gas. Some US coking coal with high caking property are low in sulphur and their ash content are around 5% to 8%, which can reduce ash content when used in coal blending. This will feed up the shortage of coking coal with high caking property in China.

 

Despite the price fall, the marginal high cost supply of metallurgical coal from the US is not being cut back. Roper pointed out that the recent US bankruptcy legislation allows mines to keep producing even though a company filed bankruptcy. A typical example is Patriot Coal, which went bankrupt two years ago.

 

Mongolia

Mongolia produces high quality coal at low costs, but the challenge it faces is clearly the lack of infrastructure, which makes it one of the highest-cost suppliers. Railways are under construction but they are a long way from fruition. Roper forecasted that its export is not growing. Mongolia's restricted foreign investment policy is also one of the factors that limited the imports and exports market.

 

Mozambique

Mozambique is believed to have great potential, but it is held back by the same logistic problems. The Vale project being developed in the northwestern region was planned to include the barging of coal down the river at low costs. This was however banned by the government's environment policy. Upgrading of rail lines and ports are underway but it will take some time.

 

According to Sun’s estimation, in the next few years, China’s major coking coal suppliers will be Australia, Russia and US, which has provided more options for Chinese importers.

 

"A rational pricing for China is highly suggested," he said.

 

Roper also observed that some of the supply expansion projects have been shelved, such as those in Australia, which will likely improve the potential market balance in the second half of the decade.  

 

The coking coal only accounts for 26% of the recoverable coal reserve in China. Under the pressure of environmental protection, steel companies are using larger blast furnaces which set a higher standard for coking coal blending. Coking coal with high caking property will have 60% to 65% of the main coking coal demand.

In an effort to reduce carbon emissions, Sun said that the growth of domestic coking coal production is expected to slow down.

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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