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Australian coking coal miners get boost from low prices, China deal

Australian coking coal miners have received two recent, and rare, pieces of good news, one obvious and the other counter-intuitive.

The obvious one is last week's signing of the free trade deal with China, which cuts the 3-percent duty on imports of coking coal, the fuel used mainly for making steel.

The less apparent factor is the sharp fall in the quarterly coking contract with Japanese buyers for deliveries in the three months to end-September.

The end of the Chinese import duty gives Australian miners an immediate advantage against their main seaborne competitors, namely Canada and Russia.

It also helps erode the cost advantage of Mongolian miners, who have taken substantial market share from Australian producers so far in 2015.

China's imports of coking coal fell 24.2 percent to 14.67 million tonnes in the first four months of the 2015 from the same period last year, according to customs data.

Australia still supplies about 50 percent of China's imports, but shipments dropped 26.2 percent in the first four months.

In contrast, China's imports from Mongolia increased by 9 percent to 4.45 million tonnes, or roughly 30 percent of the total.

The next two biggest suppliers were Canada and Russia, whose shipments fell 14 and 39 percent respectively.

It's not hard to see why imports from Mongolia have ramped up, given that the customs price was $45.62 a tonne in April, considerably lower than the $105.58 from Australia, $110.31 from Canada and the $93.27 from Russia.

The cost of Mongolian coal will rise once transport costs from the border to steel-producing areas in provinces such as Hebei are factored in, but it will still be cheaper than any other alternative.

But the removal of the 3-percent import duty on Australian coking coal will increase its cost advantage over Canadian supplies, and narrow the gap to Russian cargoes.

PRICE DECLINE HELPS, SORT OF

But it's the decline in quarterly coking coal contract prices with Japanese buyers that has the biggest potential to boost Australian producers.

Third quarter contracts were settled at $93 a tonne for premium hard coking coal, according to two people familiar with the negotiations.

This was a drop of 15 percent from the second quarter, and means coking coal has now lost more than two-thirds of its value from the record around $330 a tonne in mid-2011, when supply was constrained by flooding in Queensland, the main producing state in Australia.

The contract price tends to influence the spot price, which has also been declining, down to about $88.42 a tonne for free-on-board cargoes from Australia at the end of last week.

While this is slightly higher than in recent weeks, it's down from about $115 a tonne at the start of the year.

The decline in both spot and contract prices is likely to put further pressure on supplies from Canadian mines.

At a Chinese customs cost of $110.31 a tonne in April, it's hard to see how Canadian producers can be competitive.

They are at risk of going the same way as U.S. coking coal miners, who have seen exports to China drop to zero this year from 2.09 million tonnes in 2014, which in itself was a 66 percent fall from 2013.

With supplies from Mongolia likely to reach capacity constraints, it would appear that Australian producers are best positioned to replace high-cost Canadian cargoes.

Another factor to consider is China's own coking coal output appears to be declining, with May production dropping 4.2 percent from the year-earlier month to 37.69 million tonnes, the National Bureau of Statistics said on June 11.

While it's not an overly bullish picture for coking coal miners in Australia, it appears that their competitive advantage as been enhanced by recent price moves and the free trade agreement.

It's possible the coking coal market is finally getting to the last men standing scenario, which points to a bottoming of prices and the distant hope of an eventual recovery.

source: http://in.reuters.com