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Interview: Andrew Jones, Analyst, Resource-Net

Andrew shares his views on the long-term demand outlook for sea-borne coking coal, how the different suppliers of coking coal are faring and the likelihood for pricing indices to be widely adopted by the industry.

Coaltrans Conferences (CC): How is the long-term demand outlook for sea-borne coking coal?
Andrew Jones (AJ): World metallurgical coke production peaked at 685m tonnes in 2014, according to Resource-Net data, and will almost certainly be lower in the future.

Last year it was 649m tonnes, a 36m tonnes decline. That is not to say, however, that demand for sea-borne coking coal will diminish as small-scale and high-cost coal mining will continue to be phased out in China, Europe and other regions.

Over the ten years to 2016, coke production only showed a positive trend in a few countries, i.e. Germany (virtually alone among European countries), Brazil and Colombia in Latin America, some Middle East countries, China of course, plus other Asian economies (South Korea, Taiwan and Vietnam).

Everywhere else – i.e. the vast majority of European countries, North America, Russia and other FSU economies, Japan, Africa and Australia – coke production has been in decline over the past ten years and there is no sign of a reversal. 
(CC): How are the different suppliers of coking coal faring?

(AJ): Russian exports have grown by an average of 6% per year over the last decade, higher than any of the major three suppliers, Australia, Canada and the US.

Much of its growth has been due to supply to Ukraine, where the conflict has disrupted domestic production. It is also making inroads into the Asian markets, however.

Australia remains by far the largest sea-borne coking coal supplier, of course, its exports reaching 190m tonnes. Long-term growth has been almost 5% per year and shows no sign of faltering.

The US has traditonally played the role of swing supplier on the market due to its high-cost production. US exports have been declining since 2013, and a turnaround is unlikely despite the new administration’s supposed favourability towards coal.

While the US remains an important supplier to Europe, it will only be competitive in Asia when prices are high for a sustained period of time. Canada remains a competitive exporter of coking coal, able to sustain its production even when prices are low.

Supply from Mongolia almost doubled last year to 24m tonnes, but it will remain part of the Chinese picture only.

With availability from Mozambique continuing to under-perform and supply from smaller poducers falling away, consolidation of coking coal supply is set to continue. 
(CC): Will pricing indices for coking coal be widely adopted by the industry?

(AJ): It seems that to date these indices have gained the most acceptance in Asia, where Australia is the dominant supplier and their most ardent proponent.

Steelmakers there buy on a mix of quarterly benchmark, spot and monthly index-based agreements. In the rest of the world, the indices have yet to gain widespread acceptance, though it is said that everyone looks at them!

The main issue for the industry is the extreme volatility shown by the daily indices, which mainly reflect spot trade from Australia to China (also India possibly).

Under-capitalized Chinese steelmakers carry minimal coal stocks, and temporary shortages can have a disproportionate impact on spot prices.

In the past six months or so, there have been two separate price escalations, both of which rapidly dissipated as they did not reflect any underlying shortages.

European steelmakers are interested in index-based coal agreements but only if they can pass them onto their customers as part of annual steel price agreements.

This is likely to be a “tough sell”! In North America, pricing remains annual with some quarterly adjustments, and there is said to be no mood to change.

There is a view that the unpredictable short-term volatility is in neither side’s interest.
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.