Coking Coal Prices Threaten Production

Coking Coal Prices Threaten Production

With coking coal demand stagnating in China, India, South Korea and Japan, contract and spot market prices are nudging companies closer to production cost barriers.

Demand for coking coal from all four Asian industrial titans saw support in the first half of the year after China’s government boosted spending in late 2011 and returning Japanese steel production helped to offset slagging European demand for steel-producing coal.

But the big four Asian economies have seen economic growth fall in the second quarter of this year, with China’s economic growth in Q2 falling below 8 percent for the first time since the 2008-09 economic crisis.

Hopes that China’s most recent round of economic stimulus — US$150 billion in infrastructure spending was announced last week — will create support for sliding imports of coal are premature, Reuters reported, because domestic prices remain low and inventories of high-priced coal still need to be consumed.

“The Chinese look to be reducing their rate of demand for steel and they are overstocked, so it’s certainly likely that growth in demand for steel will be near zero in the next few months,” Peter Fish, managing director at UK steel consultancy Meps, told Reuters.

As spending stabilizes and producers look to renewed coal supply contracts to help cover growing production costs in a number of key regions, the strong coal imports witnessed in the first half of the year are not expected to continue in China.

Benchmark coking coal prices dive

Price negotiations are currently underway for coking coal contracts between Australian suppliers and Japanese steel mills, which traditionally set the benchmark price for met coal. The initial figures coming out of talks for December delivery illustrate just how far prices have fallen.

Bloomberg reported that prices could settle around the US$175/ton mark, 25 percent below contracts signed three months earlier.

Contract coking coal prices have maintained a premium of $10 to $20 over spot prices, indicating some hope. However, the previous contract price of $225/ton is said to have been inflated due to supply disruptions coming out of the Australian basin.

Low-volatility coking coal, such as semi-soft and pulverised coal injection, has also fallen, leading many producers to believe that market prices in the coming months may be unable to cover production costs.

Queensland raises coal royalties, companies announce cuts

The government in Queensland, Australia’s main coking-coal-producing state, did not do itself any favors after it announced this week that it will raise coal royalties between 10 and 15 percent. That drew the ire of Australian miner BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) and local iron ore mining magnate Clive Palmer.

BHP criticized the increase earlier this week, just as it announced that it plans to halt production at its Gregory coal mine on October 10 in response to high costs, the staggering economic environment and rising operational costs.

“We made it clear to the Queensland Government that in the current environment any additional taxation impost will directly impact the profitability of our current operations and will affect business decisions on capital growth allocations in the State,” BHP was quoted as saying in a Reuters article.

Xstrata (LSE:XTA) said this week that it will cut about 600 jobs at its coal operations in Australia, while Peabody Energy (NYSE:BTU) confirmed earlier this month that it has delayed its Codrilla mining project in Queensland. Peabody’s project would have added up to 3 million metric tons of coal a year to the market.

So far this year, more than 10 million tonnes of US coking coal output has been cut due to costs and slumping demand.

 

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.