Commodity Analysis

Coking coal in bear grip

Maulik Madhu | Updated on January 20, 2018 Published on May 01, 2016



coal eps

World coal import demand is expected to rise only gradually in the coming years

Metallurgical coal (coking coal) prices have been on a downtrend over the last few years — from $150 a tonne in September 2013, the price halved to $75 by mid-February 2016.

While prices have moved up by about 30 per cent since then, the outlook remains bearish with coal supply expected to exceed demand.

The recent steel rally in China was driven by an uptick in construction that happens around this time of the year with the approach of warm weather. This spurred stocking up of coal and drove up prices.

China is the world’s largest consumer and importer of coal.

But, with excess steel capacity in China unlikely to disappear any time soon even as demand in the economy has slowed down, the coal price rally should be short-lived.

Metallurgical coal is primarily used in steelmaking. On the supply side, the commissioning of new coal mines in Australia even as the high-cost old mines in the country are shut down, too, should keep the supply from falling significantly. Australia is the world’s largest exporter of coal.

The story so far

China’s coal imports declined 18 per cent year-on-year in 2015. It was the first time, in 2015, that China, the world’s largest steel producer, reported a decline in the production of the metal (down 2.3 per cent year-on-year).

This hurt world coal demand. On the other hand, while there have been mine closures in Australia and the US, the cutback in coal production has not been commensurate with the fall in demand, thereby hurting prices.

The export price of Premium Hard Coking Coal (FOB) from Australia declined about 30 per cent last year.

Providing an explanation for the current weakness in the global coking coal market, Goutam Chakraborty, Research Analyst, Emkay Global Financial Services, says, “In anticipation of robust steel demand, many mines were opened in the past few years, adding to the world coking coal supply.

This was also the time when coal prices were high. But then, the Chinese slowdown started and the steel outlook also turned negative. Accordingly, coal prices also started declining, forcing the big miners to shut down the high-cost mines. But, at the same time, new mines, with lower cost of production, were being commissioned. These mines are still operational and continue to make money even in the current coal market.”

Moderate rise in demand

According to the latest Resources and Energy Quarterly by the Office of the Chief Economist, Department of Industry, Innovation and Science, Government of Australia, China’s coal imports are predicted to decline from 53 million tonnes (mt) last year to 48 mt in 2016 and to 45 mt in 2017.

This will come about with the expected decline in Chinese steel demand, as the economy transitions from being investment-driven to being fuelled by consumption. China’s steel demand is expected to contract 4 per cent to 645 mt this year, followed by another 3 per cent decline in 2017.

India, which is among the biggest steel producing countries in the world, on the other hand, is expected to see an increase in its coal imports.

Helped by the boost to the infrastructure sector, India’s steel consumption is expected to expand 5.4 per cent to 84 mt in 2016.

India does not have sufficient metallurgical coal reserves (and the available reserves are of poor quality) and is dependent on imports for almost its entire requirement of coal.

At the aggregate level, world coal import demand is expected to increase only gradually in the coming years; from 223 mt in 2015 to 230 mt in 2017, show estimates from the Resources and Energy Quarterly.

Excess supply

And while world coal exports too are expected to fall, the decline is likely to be moderate. In 2015, mine closures and temporary production cuts in Australia led to a small decline in the country’s coal exports. But many new mines are expected to be commissioned this year and in the next.

According to the Resources and Energy Quarterly, Australia will export 183 million tonnes of coal in 2016 and 186 million tonnes in 2017, the latter the same as in 2015.

The US and Canada are, however, expected to lower their production and exports. At the global level, coal exports are expected to reach 284 million tonnes both in 2016 and 2017, down from 292 tonnes in 2015.

Thus, while the coal export-import gap is expected to narrow down in the coming years, coal prices are likely to stay under pressure, unless there are significant mine closures.

Published on May 01, 2016
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