Wood Mackenzie’s Near-Term Market Outlook cautions of falling metallurgical coal prices from now to Q4 2012, dropping from the current quarterly price of US$285/t for premium metallurgical coal to under US$ 240/t. However, this price remains significantly above the marginal cost of production and longer-term drivers point to robust metallurgical coal demand in the Asia-Pacific market.
Prakash Sharma, a coal market analyst, said: “Prices have started to fall from the last quarter and will continue to decline due to softening demand and the recovery of supply from flood-hit basins earlier in the year. The weakening demand is largely attributed to the global macroeconomic slowdown, which appears to have accelerated through the summer in much of the developed world. Leading industrial indicators suggest a sharp deterioration in manufacturing activity – reflected by the decline in global steel production.”
Wood Mackenzie’s senior economist, Ed Rawle, said: “The global economy has entered a period of extreme uncertainty. Wood Mackenzie’s global GDP growth forecast has been revised down from 3.1% to 2.8% in 2011, and 3.7% to 3.6% in 2012. But there are significant downside risks to this outlook. The Eurozone debt crisis remains unresolved and threatens to trigger a European banking crisis. Due to the sheer scale of the European banking sector, this is of major concern since it would likely lead to a global banking crisis with implications for us all.”
Despite near-term downward price movements, Wood Mackenzie says that several factors have the potential to turn this trend. Firstly, some mines have not fully recovered from the flooding in Queensland earlier this year. The approaching wet season could lead to further delays in some mines attaining full production levels. Secondly, persistent worker-strikes at BHP Billiton Mitsubishi Alliance-operated mines have the ability to tighten the market as these operations produce 26% of globally-traded metallurgical coal. Lastly, US low-volatility supply has been curtailed by mine outages and changes in blending techniques following various mergers.
In the long term, investors are still energised by the metallurgical coal space with high margins in a current supply-constrained world. Sharma explained: “Strong long-term demand is likely to support M&A activity that has been ongoing since early 2008. Demand growth will be led by emerging markets, with Asia accounting for 75% of global metallurgical coal demand by 2030. China and India will be key demand drivers, contributing to 60% of Asia Pacific’s total import demand.”
The growth potential of China and India can be attributed to their economic climate relative to the rest of the world. “The bright spot amidst the uncertainty continues to be the developing world. Specifically, we see China and much of Asia powering ahead, drawing on growth drivers that have been deliberately de-coupled from troubled developed economies over the past couple of years,” said Rawle.
Wood Mackenzie says that China’s reliance on metallurgical coal imports will increase due to insufficient supply of high quality metallurgical coal in the domestic market. China is forging ahead with plans to close all blast furnaces under 1000 m3 and install new blast furnaces with capacities in excess of 2000 m3. The larger furnaces need coke produced from high-quality metallurgical coal. As a result, a larger volume of this type of coal will be required and China will have to turn to suppliers of the likes of Australia, Mongolia and, to a lesser extent, Mozambique who are all expanding supply.
“The industry should expect premium metallurgical coal prices to fall to a price below US$ 240/t from now until Q4 2012,” Sharma summarised. “Although further downside price risks remain given ongoing macroeconomic uncertainty and new sources of supply entering the market place, the constant threat of additional unpredictable mine outages and the upcoming rainy season in key supply basins should keep them from falling too far. Long-term demand also remains strong in emerging markets.”
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