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Metallurgical Coal Price Forecast - Australia’s Department of Industry, Innovation and Science

Steel News - Published on Fri, 12 Jan 2018

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Australia's Department of Industry, Innovation and Science in its latest Resources and Energy Quarterly reported that Metallurgical Coal Prices stopped declining, as high demand added to new supply concerns. After a September quarter rally, the Australian Prime Hard Coking Coal (HCC) FOB spot price steadied in 3 relatively narrow (USD 178-242 per tonne) range as 2017 ended. Australian Prime HCC is estimated to have averaged USD 186 per tonne in 2017, up 29 per cent. Price strength derived from strong demand and concerns over supply (arising mainly from bottlenecks in the Australian export system). US metallurgical coal prices stayed below Australian prices, helping to cap the latter. The winter curtailment of a significant amount of Chinese steel capacity is expected to take its toll on metallurgical coal prices as the year turns. Rising supply, due to the return of previously idled capacity and new project supply, is forecast to see prices fall as 2018 matures. However, spot metallurgical coal prices are expected to hold above the USD 77-135 per tonne range experienced during from the start of 2014 until mid 2016. Carrying on the practice recently adopted quarterly contract pricing for Prime HCC continues to use the prior three-month average of three independent prime HCC spot assessments. The December quarter 2017 price equated to a benchmark price of USD 192 per tonne. The Australian benchmark contract price is forecast to drift lower in the next eighteen months (to end 2018-19) as the impact of rising supply more than offsets firm demand.

World metallurgical coal trade is estimated to grow noticeably in 2018. As the market recovers from the supply disruptions of 2017. In 2019, trade is expected to expand further, but not at the same rate as in 2018. Australian exports should recover from the impacts of Cyclone Debbie and seismic events at the Appin mine, which together appears to have caused the loss of around 10 million tonnes of exports in 2017. A weak La Nina episode is assumed to leave Australian output exports (which account for over half world exports) largely unscathed in 2018, though there are high risks. China, India, South Korea and Europe will account for the bulk of the rise in metallurgical coal imports, on the back of healthy gains in steel output.

In 2017, China is estimated to have imported around 71 million tonnes of metallurgical coal, up from less than 60 million tonnes in 2016. Imports rose as both strong demand from Chinese steel mills and constraints on domestic coal production forced buyers into offshore markets. In mid 2017, four of China's largest metallurgical coal producers voluntarily cut output by one tenth, or about 13-14 million tonnes. Debt levels at major Chinese metallurgical coal miners remain high, and prices need to stay above USD 140 a tonne for these miners to clear their way out of trouble. The curtailment of a significant amount of Chinese steel-making capacity during winter will see some significant seasonal swings in import demand over the forecast period. In 2018, Chinese production of metallurgical coal will (still) be constrained by the impact of ongoing mine safety inspections across Shanxi province. With Chinese metallurgical coal production held down and the price of metallurgical coal in gradual decline (as ex-China supply improves), Chinese steel mills are likely to use any sharp import price dips as an opportunity to re-stock metallurgical coal. Chinese steel mills ran down metallurgical coal inventories heavily during 2017 and they will be keen to rebuild those inventories, especially if they believe that the current La Nina event weather might hurt Australian metallurgical coal production again. Chinese imports of metallurgical coal are thus expected to remain relatively high in 2018 and 2019, with the possibility that China could overtake Japan as the world's largest metallurgical coal importer during that period.

Indian imports of metallurgical coal recovered in the second half of 2017 after the price spike brought on by Cyclone Debbie forced Indian steel mills to run down inventories in April-May. Indian steel mills turned to US miners as problems in Australian supply and the price advantage persisted. For the year as a whole, imports are estimated to have risen modestly from 2016. India continues to ramp up its steel production capacity towards its target of 300 million tonnes per annum by 2025 helping underpin metallurgical coal demand. As part of this plan, India has continued to impose import duties of as much as 20 per cent on a range of steel products. Indian imports of metallurgical coal are expected to grow significantly in 2018 and 2019, as the domestic coal industry struggles to keep up with strong demand for metallurgical coal from Indian steel mills. Lower metallurgical coal prices will encourage the rise in Indian imports.

South Korean imports of metallurgical coal are expected to grow in 2018 after a minor gain in 2017. South Korean steel mills were forced to look to Canada, Russia and United States for supply after Cyclone Debbie impacted on Australian exports. South Korean metallurgical coal demand will be boosted by firm growth in domestic steel production. Korean steel production will remain firm, as motor vehicle manufacturers and ship builders look to satisfy firm demand.

Metallurgical coal imports are estimated to have declined modestly in 2017. The decrease in imports came despite some leveling out of the last few years decline in Japanese steel output. It appears that Japanese steel mills ran down their inventories of inputs as metallurgical coal prices spiked in the wake of Cyclone Debbie. Japanese steel producers seem to have benefited from the pick-up in domestic economic activity and the broader world economy, as the demand for manufactured goods rises. Business confidence has been strong: a consequent rise in capital spending has been supported by surging corporate profits as well as preparations for the Tokyo Olympics. Imports of metallurgical coal to Japan are expected to grow modestly in 2018 and 2019. Japanese output of crude steel is expected to continue to recover, as the demand for Japanese motor vehicles picks up further.

It is estimated that seaborne exports of US metallurgical coal reached almost 46 million tonnes in 2017, about 11-12 million tonnes above levels of 2016. But further gains seem unlikely in 2018 and 2019. After years of heavy cost-cutting and widespread bankruptcies, US miners' ability to access finance to fund a further sharp rise in output is in doubt, particularly when their (potential) financiers know that the price spikes of 2016-17 were overwhelmingly the result of temporary, not structural, forces.

Canadian exports are estimated to be marginally higher in 2017. But significant gains are likely in 2018 and 2019. Conuma Coal is restarting production at its Wolverine and Willow Creek mines, and Cline Mining's 2.8 million tonnes per annum Donkin project continues to ramp up production from its start in March. In 2018, Jameson Resources 2 million tonnes per annum Crown Mountain project commences production. As arguably the lowest cost producer among the major exporting nations, Canada is set to remain a significant competitor to Australian producers.

Mongolia's January-October metallurgical coal exports to China have increased by almost 30 per cent year-on-year, and accounted for over 37 per cent of China's metallurgical coal imports. Chinese importers stepped up their purchases after Australian metallurgical coal supply was disrupted by Cyclone Debbie. Mongolia is likely to have exported around 25 million tonnes of metallurgical coal in 2017, virtually all of it going to China. With plenty of high quality metallurgical coal reserves, high prices should see exports to China remain strong in 2018 and 2019.

Russian exports of metallurgical coal rose modestly in 2017, as miners struggled to react to the price surge brought on by Australian shortages. Exports are likely to pick up in strongly in 2018 and 2019, as production at Mechel's Elga operations ramp up to nameplate capacity.

Brazilian miner Vale continued to ramp up output at the Moatize mine in Mozambique in 2017 and is now expected to produce almost 8 million tonnes in 2017. The development of the 18 million tonne per annum Nacala transport corridor has reduced supply chain bottlenecks and been a crucial factor in raising economies of scale and thus reducing costs. Exports from Mozambique are forecast to show strong growth in the forecast period. The ramp up of operations at the Songa and the re-start at the Benga operations will make a significant contribution to this growth, particularly in 2019. However, Mozambique's exports will remain more than half those of Canada, Russia, the United States and Mongolia.

World metallurgical coal trade
WorldUnit2016s2017 f2018 f2019 f2017 f YoY2018 f YoY2019 f YoY
Metallurgical coal imports
- European Union 28Mt404141421.01.01.0
- JapanMt51515353-
- ChinaMt5971595319.9-16.6-10.0

- South KoreaMt353637374.02.01.0
Metallurgical coal exports
- AustraliaMt188177194194-6.49.9-0.4
- CanadaMt282829290.91.21.2
- United StatesMt3446363524.9-22.0-3.0
- RussiaMt222425269.85.03.0
Wodd tradeMt314308315321-

Notes: s Estimate; f Forecast.
Source: IEA (2017) Coal Information 2017: Department of Industry, Innovation and Science (2017)

Australia's metallurgical coal outlook
WorldUnit20162017 s2018 f2019 f2017 s YoY2018 f YoY2019 f YoY
Contract prices e
- nominalUSS.'t114.4209.6154.5125.583.2-26.3-18.8
-real dUSS.'t118.7209.6151.3120.279.5-27.8-20.5
Spot prices g
- nominalUSS.'t143.5185.9151.1119.029.5-18.7-21.3
- real dUSS.'t146.5185.9148.0114.028.8-20.4-23.0
AustraliaUnit2015-162016-172017-18f2018-19f2016-17s YoY2017-18f YoY2018-19f YoY
Export volumeMt188.0177.2192.1192.5-
- nominal valueASm19.79035.38335.28626.21378.7-0.3-25.7
- real value iASm20.58638.09135.28625.60275.7-2.3-27.4

Notes: d In 2017 US dollars; e Contract price assessment for high quality hard coking coal; I In 2017-18 Austrafian dollars; f forecast; g Hard coking coal fob Australia east coast ports; s estimate
Source: ABS (2017) International Trade in Goods and Services. Austrafca. 5368.0. Department of Industry. Innovation and Science (2017); Platts Steel Analyzer (2017)

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Posted By : Sanju Moirangthem on Fri, 12 Jan 2018
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