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Interview: Colin Hamilton, Head of Commodities Research, Macquarie Group Limited

Colin Hamilton discusses metcoal supply contracts, under-cutting among metcoal suppliers, and expected growth in India’s steel consumption. Plus, Colin shares what he is most looking forward to about The World Coal Leaders Network.

Colin Hamilton is a London-based Commodities Analyst for Macquarie, where he is responsible for the day-to-day management of the global commodities research function, encompassing teams in London, Singapore and Shanghai.  Colin’s team services the equity, LME trading and corporate advisory divisions of the bank with steel, coal, metals and minerals research and market intelligence. He is widely regarded by clients as a global expert in steel, iron ore and metallurgical coal.

The Q2 metcoal supply contracts were concluded at the lowest level in a decade. What will be the key deciding factors in deciding the Q3 negotiations and at what point can we start to expect some significant upswing?

The global weakness in steel demand and output will be a big factor, and for Q3 the changes in currencies (not least the RMB) will also be factored in.  Producers will point to the lower volumes coming out of the US, but there is little doubt the global market remains more than adequately supplied at the present time.

Contract and spot prices appear to have converged more than ever. How much metcoal are the Japanese buying on a spot vs contract basis now, and how quickly do you think quarterly contracts will lose relevance in price benchmarking? 

Met coal hasn’t moved the same way as iron ore, where the vast majority of contracts are now spot-linked, but rather there is a portfolio method used with a mix of annual, monthly, quarterly and spot (particularly on the producer side).  The main consumer angle still favours benchmark and while the Japanese are leading, this will remain crucial (although the price itself is little more than a reference).  With Indian buyers now taking ~50% more met coal from Australia than Japan does, perhaps the key change will be a shift from CFR China towards CFR India pricing for spot contracts.

Where are there remaining opportunities for production cuts among metcoal suppliers? How much production cutting is likely to come from forced closures due to unsustainable mines vs. more planned production cuts we have seen from TECK and Glencore? 

Met coal is a bulk commodity market – it has to balance.  Unless production cuts come to an appropriate level from US exporters and Chinese domestic producers, we may see more “maintenance” from the major seaborne players over the next 6 months.

Many international coke producers and steel makers have been suffering due to under-cutting by Chinese suppliers who have been producing at below cost. In your view what is the outlook for the Chinese to continue this practice and is there any serious risk of embargoes from importing countries e.g. India and Brazil? 

I don’t agree that the Chinese are selling below cost – it’s just their costs have come down dramatically for both coke and steel.  In terms of coke, China will continue to export its overcapacity and given the importing countries are met coal short there is little likelihood of trade embargoes.   In terms of steel, China will also likely continue to push its surplus onto other emerging regions, but the pressure for trade cases is already gaining momentum.  In the end, economics tends to win and if it is still profitable for the Chinese to export steel (owing to international prices being too high) they will do so.

How quickly do you see India’s per capita steel consumption growing over the next 5 years and why? 

We expect India to grow steel consumption at ~7.5% CAGR, as urbanisation continues and the government delivers better than their predecessors on steel-intensive projects.  It won’t be a smooth path however – this growth number will cycle around a lot.

Which question or industry issue are you most interested to hear discussed at this year’s conference in Barcelona? 

Coal supply will have to adjust, but will there be any change from the steady grind we see at the moment to a recognition that wider markets will reward supply cuts, even if that is not the natural behaviour of miners.

You can hear more from Colin at The World Coal Leaders Network in Barcelona on 18 - 20 October, where he will be taking part in an Oxford Style Debate on the future for thermal coal trade.

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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