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Metcoal demand on the up, pricing remains volatile

The ongoing economic growth in the Asian-Pacific region will continue to drive the demand for metallurgical coal, however the prices will remain flat in the next few years, most panelists and participants of the 20th Anniversary Coaltrans Asia session on Asia’s metcoal market agreed.

“There’s been a 4-6% global metallurgical coal demand growth over the past few years”, pointed out Mike Elliott, Global Mining and Metals Leader, EY, “Germany and France have shown negative growth, while China and India account for most growth due to steel demand in construction, infrastructure, automotives, oil and gas”.

India’s metcoal demand is expected by 34.6% of audience respondents to support an otherwise China-driven global demand in the long term if not eventually lead the way in imports, if China cuts back over environmental concerns.

An audience survey on the state of the seaborne metallurgical coal market revealed that 66% of participants expect a flat hard coking coal price on a 3-4 year view while 95% of respondents expect the price above US$100/t longer-term.

The existing oversupplied market remains highly sensitive to currency exchange fluctuations. In the short term American producers benefit from the loose US monetary policy and weak dollar and continue to put supply on the seaborne market. However, the inevitable realignment of currencies might undermine their positions longer term, says Mike Elliott:

“Other producers are forced to go through a process of cost cutting and efficiency-raising to offset the currency effects and will emerge stronger in the long term leaving the US producers in a weaker position”.

Given the subdued pricing and no sign of significant production cutting, cost cutting remains the key issue for most mining operators globally. However, 66.7% of the audience saw cost reduction efforts as efficient only short term (<3 years). With short term measures such as the squeezing of the supply chain, getting more out of contractors, renegotiating the arrangements, and cutting discretionary expenditure, it is not obvious what can be done long term, suggests Mike Elliott. He predicted more investment in lower cost technologies, more focus on the customer relations side of operations and the engaging of big data technologies for productivity improvement.

Investment in infrastructure to boost efficiency might be problematic for the US due to production debt accumulation: according to Mike Elliott, 55% of coal production was cash-flow negative in April 2013. Some of this debt is due to the thermal coal market lows. Bankruptcies driving out smaller players could rebalance supply-demand dynamics in the sector, but for now it still appears cheaper for US producers to put mines under care and maintenance than face closure environmental requirements, he says.

In the current conditions, Australia is viewed by the majority (40.7%) of the audience as a supply region which will represent the biggest game changer by 2018 due to high-level infrastructure and expectations of eventual price correction (AUD to depreciate by 18% against the USD by 2018, according to Mike Elliott). Mozambique is viewed by 20.9% as another promising region while Tomo Suzuki, Manager Coal & Fuel Purchasing Section at Kobe Steel, pointed out that Russia is likely to have a greater share in Japan as it is successfully tackling its historical coal quality problems.

Meanwhile, the US Environmental Protection Agency revealed on 2nd June that it is seeking a new proposal by 2030 to reduce America’s carbon dioxide emissions by 30% from 2005 levels, a move which may affect the supply side on the global metallurgical coal market in the coming years.

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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