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Coking coal prices to bottom in Q4, track China demand uptick in 2015: analyst

Seaborne coking coal contract prices are seen likely to bottom at $118/mt in the fourth quarter before starting to pick up in 2015 tracking an uptick in China's property market, ANZ's Head of Commodities Research Mark Pervan told the International Mining and Resources Conference in Melbourne Tuesday, September 23.

"We are not going to see a strong recovery story. There is still a lot of supply there and Chinese demand is not going to take off," he said.

"The current spot price is around $113/mt and the current contact is at $120/mt. We expect to see maybe $1-2/mt to be taken off that before we see a bit of recovery in 2015."

Platts assessed Premium Low Vol coking coal unchanged day on day at $123/mt CFR China Tuesday, which equates to $110.50/mt FOB Australia after deducting $12.50/mt for Panamax freight.

Pervan said the coking coal market was moving back into a more cyclical pattern after an extraordinary peak in 2011 when floods in the Australian state of Queensland impacted more than half of global supply. "The supply response [to the 2011 price peak] is hitting the market now, just as the Chinese market gets softer. It's the classic commodity story -- supply lagging demand by about two years," he said.

"You are at the bottom of the cycle right now, when you are planting the seeds for the next price recovery. [But] we are not seeing replacement production being put in place, we are not seeing new capex going into mines, we are not seeing new investment in coal.

"So, in 2017-18 I suspect we will see a supply squeeze and you could see better prices."

Pervan said China's real estate market, as a pillar industry for steel and thus coking coal demand, was coming off sharply in 2014.

"The Chinese imposed a lot of restrictions on the property market 12 months ago, which is starting to bite now," he said.

"So right now the investor will go short with the property market coming down but I suspect the smart investor looking at the medium to long term can see this is the opportunity to be investing in the market at the bottom of the cycle, with the cycle picking up in two-three years' time."

"The Chinese property market will bottom out in the second quarter of next year. So in regards to steel prices, you have a headwind for the next three-six months when the market is going to be still declining on real estate prices in China, then it will pick up in the second half of next year.

"Coking coal and iron ore prices are likely to start seeing support towards the end of the year on that recovery."

LONGER TERM INDICATORS POSITIVE

In the longer term term, the indicators for the seaborne coking coal market were positive from China and from India, Pervan said.

China's steel sector was increasingly moving towards plate production for consumer products in the southern provinces that relied on imported raw material imports and away from rod production using domestic coking coal in the northeast, he added.

"We [ANZ] are pretty confident that China will become more dependent on imports of both coal and iron ore going forward as they reconfigure their steel industry," he said.

"The next story will be India, but we are not getting too excited as it's certainly off a low base. But it's going to grow; it's going to be positive for coking coal because India has a lot of iron ore and it does not have much coking coal.

"But India needs to build its infrastructure. [So] It's not a simple equation," he added.

Source: Platts