Coking coal saw an unprecedented price rally for most part of 2016. Seaborne coking coal prices touched a high of USD 316/mt before receding, an encore of 2011 prices when coking coal peaked at USD 335/mt as a fall out of floods in Queensland, the key exporting region in Australia. Last year, supply tightness was the key contributor to escalating coking coal prices. Lower production by Australia coupled with China’s planned cut in man days in coal production triggered what analysts now bill an unsustainable price spike – the curve has sharply moved down for the best performing commodity of 2016.
Towards October 2016, coking coal prices started spiraling at USD 260/mt, touching crest at USD 316 on the back of growing Chinese appetite. As supply woes began to ease, prices plummeted to USD 259/mt in December finally correcting to USD 191 in January 2017. Seaborne coking coal trade is largely influenced by China, the biggest importer and Australia, the numero uno supplier. In 2016, China implemented a strategy to accelerate its reduction of coal, which backfired a bit. China moved to cut its coal dependence by cracking down on coal production, before demand experienced an equivalent decline. This resulted in supply tightness, and a price rally for coking coal ensued. The seaborne coal rally was spurred by supply issues after Beijing’s decision to limit coal mines’ operating days to 276 or fewer a year from 330 before as it sought to restructure the industry. Force majeure in Australian coal mines and fear of cyclone La Nina strike added to the supply side woes. With the planned production cut, China’s imports of coking coal jumped 45% in August 2016, the country’s highest in 13 months. Then, the Chinese steelmakers petitioned their government for higher coal output as rising prices and tighter supplies had hurt operations.
Coking coal price rally was also noticeably influenced by India, a key player in this trade. In FY17, the country imported 36 mnt of coking coal by the end of December. 32 mnt of those imports originated in Australia. Tata Steel, JSW Steel, JSPL and SAIL were the major contributors to the imported coal traffic.
Now with the tide turning in favor of steel companies with cooling of coking coal prices, they can breathe easy. The trigger for falling prices of coking coal was led by China that started easing restrictive coal production measures towards September and reinforcing it further in November, which happened co- terminus with coking coal production bouncing back to normal levels in Australia.
The downtrend in coking coal prices is poised to continue in 2017. Towards the April-June quarter, prices of the commodity could be seen settling at USD 150/mt, feels a metal sector analyst. Apart from China restarting its production, a changed geo-political context in the aftermath of Donald Trump being sworn in as the next US President is seen as a decisive factor to influence seaborne trade. Noted metal sector consulting group CRU feels the rebound in Australian production has led to coking coal prices falling considerable. Rising production by China is also bound to exert a downward pressure on prices in 2017. In its price forecast for 2017, Goldman Sachs has pegged coking coal prices at USD 135/mt and this prediction is after an upward price revision by 64%.
While lower price forecast for coking coal should act as a balm to the frayed nerves of Indian steel companies, they should focus on long term supply security to stay afloat in competition. Steep coking coal prices have already shrunk margins of the steelmakers, eroding their bottom-line. Amid depressing prices, the domestic steelmakers can look to seal long term coking coal contracts given the volatility in its trade. Those with overseas coal assets need to fast track mining.
Coking coal production has to be beefed up in India to provide a long term cushion to the steel players. Though India has a proven reserve of 34 bnt of coking coal, its production is inadequate and the high ash content makes it unsuitable for use in blast furnaces powered steel mills. Two Coal India subsidiaries – Bharat Coking Coal Ltd and Central Coalfields Ltd produce 99% of all the coking coal in India. Around 30 mnt of washery grade coking coal is fed to the power plants each. If the ash content of such coal is reduced from 34% to 15%, it can be used for steelmaking. This calls for large scale coal washing facilities. End user industries, especially the steel companies can be tasked with washing all washery grade coal, allowing middlings to be used for power generation.
Exploiting its own coking coal deposits can best help the country’s steel industry counter imports and stay cocooned from the vagaries of sea borne trade.
Source: Steel 360 Magazine Feb’17 Issue