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Lower coking coal contract price shows downward pressure

Coking coal prices are yet to show signs of bottoming with bearish signals from both contract talks between Australian producers and Japanese buyers as well as Chinese demand.

Hard coking coal for second quarter delivery was settled at $109.50 a tonne free-on-board between producer BHP Billiton and buyer Nippon Steel, Morgan Stanley said in a research noted on April 6.

This was down 6 percent from the previous quarter's contract and represented a 7 percent premium to the spot price at the time the deal was concluded.

The premium to the spot price is in line with prior settlements, with Japanese buyers willing to pay above spot in order to guarantee supplies.

Coking coal, also known as metallurgical coal, is used in steel-making and is traditionally a higher value product than thermal coal used in power generation because it has a higher energy value and fewer impurities.

However, coking coal prices are now down two-thirds from their peak around $300 a tonne in 2011, while benchmark thermal coal prices at Australia's Newcastle Port have dropped about 55 percent over the same period.

Similar to thermal coal, coking coal has suffered from oversupply as global miners responded to the view that Chinese demand would accelerate for years to come.

This view has been challenged by recent events, with China's imports of both coking and thermal coal slowing significantly.

Coking coal imports totalled 62.3 million tonnes in 2014, down 17.3 percent over 2013, according to Chinese customs data. In the first two months of 2015, imports were at 7.98 million tonnes, down 13.6 percent over the same period last year.

If the pace of imports in the first two months is sustained for the rest of 2015, it implies a total of about 48 million tonnes, which would be a drop of 23 percent on 2014.

MONGOLIA RISING

The slump in coking coal prices has effectively knocked higher cost producers out of the Chinese market, notably from the United States, with no imports from the country reported in the first two months of 2015 and a drop of 66 percent in 2014.

But worrying for producers in top exporter Australia is signs that Mongolia is ramping up its shipments to its southern neighbor.

Imports from Mongolia stood at 2.22 million tonnes for the first two months of 2015, a gain of 70 percent over the same period last year, while those from Australia dropped 25.4 percent to 3.8 million tonnes.

This is a major reversal from 2014, when imports from Australia rose 3.5 percent to 31.2 million tonnes, while those from Mongolia dropped 4.2 percent to 14.79 million tonnes.

Chinese customs data also shows that for February this year, the cost of coking coal from Mongolia was $40.45 a tonne, compared to $110.04 for Australian cargoes.

While Mongolian coal does present more challenges in transport, given that it has to use a combination of trucks and rail, this sort of price differential makes it very appealing to steel mills, most of whom are battling low profitability.

Mongolian Prime Minister Chimed Saikhanbileg has also been touting new deals worth up to $8 billion to expand the country's copper and coal mines.

While Mongolia has told this story before, and the reality has often been less optimistic, the risk is that the landlocked nation actually does invest more and thereby increases its export capacity.

This would allow it to chase a greater share of what may be a shrinking market for coking coal in China, given the weak outlook for steel production.

Representatives of China's vast steel sector, which accounts for about half of global output, have said the country already has reached "peak steel", and that demand and production are unlikely to rise much in coming years.

If this is the case, the coking coal demand has an automatic cap.

The idling of older, less-efficient blast furnaces and the increasing use of higher-grade imported iron ore may also serve to lower coking coal demand, even if total steel output remains more or less constant in China.

Overall, it's hard to build a bullish case for coking coal prices in the absence of supplier production cuts, particularly in Australia.

source: http://www.reuters.com