Outlook for metallurgical coal is steady 2014.2.24. But now?Australian Coal Miners Cutting Costs Not Output as Rebound Seen 2014.10
Bonjour Kwon2014. 12. 15. 21:45
Mike Elliott, EY Mining & Metals, explains why the global outlook for metallurgical coal is steady despite steel industry troubles.
Despite issues of overcapacity and significant cost pressures in the global steel industry, total global demand for steel continues to increase and demand for metallurgical coal follows with it. The current slight oversupply in the metallurgical coal market will thus be corrected in the near term, as demand increases and new production projects and expansions are delayed or cancelled. As a result, the demand for metallurgical coal in the medium term may even exceed current forecasts of steady growth.
The metallurgical coal sector While the steel sector has a number of competitive issues to overcome, moderate growth in both the supply and demand of steel is still forecast. It is thus likely that demand for metallurgical coal will grow at a moderate rate.
However, the metallurgical coal market is also facing a low point in the market with some oversupply resulting in lower prices. Between June and August 2013, the Australian prime hard coking coal price fell to below US$ 140/t, the lowest since 2010. Strong new supply coming online from Australia and Indonesia is a key driver of the current low point in the market, with exports up 14% and 20%, respectively, for 2013 up until September. Many see this as the bottom of the market but prices have yet to make a strong sustained recovery.
In the face of lower coal prices, high cost producers and semi-soft product have been pushed out the market. Current production is largely coming from miners’ lowest cost mines to enable them to make good margins despite lower prices. There is little incentive in the sector at present to increase production, as it is likely to be at a higher cost and therefore lower margins.
As a result, new projects are being placed on hold until prices improve. This is in addition to the myriad of other challenges faced by miners to bring new projects onboard. Bulk mineral projects are difficult to bring online and fraught with problems, such as delays and cost blow-outs, financing issues, permitting, environmental regulations, infrastructure requirements, sovereign and political risk and execution challenges. Shareholder pressure has also recently been a factor in slowing investment in new projects. New project uncertainty is such that only 39 million t of the planned 156 million t of new metallurgical coal supply will make it onto the market by the end of 2017.
Increasing demand and trade in metallurgical coal With lower prices, the removal of high-cost producers and the difficulties bringing supply online, the metallurgical coal market will return to balance over the medium to long term. This is particularly so when the forecasts for increases in imports over the next seven years are considered. There is an anticipated increase of around 33% – largely due to enormous demand from China and India.
Chinese metallurgical coal imports are forecast to increase at an average rate of 12%/year from 2012 to reach 80 million t by 2018. Growth in Chinese metallurgical coal imports is linked not only to the increase in steel production and demand discussed above, but also to current lower metallurgical coal prices, which are forcing a number of high-cost domestic producers to put operations on hold or shut down. As domestic resources are usually located some distance from mills and are of lower quality, steel mills tend to increase their imports when the seaborne prices decline.
In India, steelmakers meet 60 – 65% of their metallurgical coal requirements through imports. This is because domestic coal reserves have high ash content and are therefore not suitable for use in the steel industry. With strong growth likely in Indian steel production, metallurgical coal imports will grow in parallel. Consumption of metallurgical coal between 2013 and 2017 is set to increase by 30% to 59 million t of which almost 70% will be imports. The ban on iron ore mining imposed in India could possibly lead to even higher imports as steelmakers will be forced to use inferior grades of iron ore that need more coal to process it into steel.
In Brazil, it is expected that average growth in steel production will be around 3.3%/year and associated steel consumption at 2.6%/year to 2018. As a result, imports of metallurgical coal will increase over the same period – an average rate of 6%/year to reach 16 million t in 2018.
Demand for metallurgical coal in the EU will remain modest with flat steel production. Steel demand in the EU continued to contract in 2013 but there are signs of economic stabilisation. As a result, steel demand may start to increase during the course of 2014. Metallurgical coal production in the region is forecast to only increase by 1.9%/year over the outlook period to reach 49 million t in 2018.
In the US, metallurgical coal producers are seeing their profits diminish in the wake of weaker domestic steel demand and excess metallurgical coal on the market. It is likely that this will continue to be the case, as US exports expanded to fill the Australian supply gap during floods in Queensland. This supply is now back online and has grown. As it is more cost competitive, it is pushing higher-cost US metallurgical coal producers out of the market. The likely appreciation of the US dollar with the tapering of quantitative easing will also render US producers less cost-competitive.
Innovation in steel production methods An area of challenge to the continued use of metallurgical coal is the increasing use of innovative technologies and methods to produce steel. As weak demand and lower prices for steel combined with higher raw material costs, steelmakers have been seeking ways to be increase their margins. Some of these methods include:
Increasing flexibility with coke blends: steelmakers are reducing productivity by running longer heat cycles using lower-quality high-volume metallurgical coals.
Using new, cleaner technologies, including direct reduced iron (DRI) or electronic arc furnaces (EAF), which use little or no metallurgical coal.
Increased use of pulverised coal or PCI. This is dependent on the price parity between metallurgical coal and PCI: during periods of higher hard coking coal prices more PCI is used as steelmakers cut costs.
The changing dynamics in the energy market have also impacted steelmakers. The emergence of cheap natural gas in the US has allowed a greater shift to DRI production: for example, Nucor’s new DRI unit in Louisiana is expected to have savings of US$ 10/t for its steel production at current gas prices.
Meanwhile, Africa has seen increased use of EAF as the cost for start-up is much lower and its scalability suits the environment. With access to cheap gas and stable electricity sources, there has also been significant uptake of EAF in the Middle East.
In line with policies and guidelines under the China’s 12th Five Year Plan, steelmakers have been encouraged to adopt new technologies to improve the efficiency of their new plants. Large Chinese players, such as Baosteel, are collaborating with global steelmakers, such as ArcelorMittal and Nippon Steel, to adopt the latest technologies and gain current technical expertise. For example, Chinese steelmakers are looking to adopt new technologies, such as Corex, Finex and ITmk3 to reduce the dependency on metallurgical coal for future projects.
However, despite increasing popularity of both DRI and EAF, it is unlikely that either will be a significant challenge to the blast furnaces as the main method of steel production.
A bright future The result of these trends is that new metallurgical coal supply is unlikely to be sufficient and timely enough to meet future demand from the steel market. And that demand – even at a tepid rate – will be substantial enough to support a healthy metallurgical coal market. The risks are mostly to the upside: demand may increase at a faster rate than expected, while supply may be impacted either by project delays and/or cost blow-outs. This under/oversupply situation is expected to increase the volatility of metallurgical coal prices both on the upside and downside.
Most importantly, while China continues to increase its steel production by an average of 7%/year, the outlook for metallurgical coal will remain strong. Add to this the possibility of a brighter global economic outlook – such as developed countries emerging more strongly than expected from the current downturn – it is likely that demand for metallurgical coal will remain at least constant and possibly grow more strongly than expected.
Note The views expressed in this article are the views of the author not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.
Australian coal industry caught in ‘perfect storm’
By Jamie Smyth
despite the industry’s problems, Australia’s coal export volumes will increase as mines built during the boom come on stream, replacing less efficient ones
Harry Kenyon-Slaney has seen tough times before in almost a quarter of a century with Rio Tinto, but the chief executive of the miner’s energy unit says the problems facing Australia’s coal industry are up there with the worst of them.
“It’s a perfect storm,” says Mr Kenyon-Slaney. “The sector is in the midst of quite possibly the most serious challenge it has ever seen to remain globally competitive. There’s every chance these tough times will continue for several years
Having done their best to ride out a two-year slump in global coal prices, Australian miners are shedding thousands of jobs as they mothball high-cost mines, sell non-core assets and drive efficiencies across their operations.
Last week BHP Billiton ended a A$360m arrangement with a contractor at one of Australia’s biggest coal mines, which will cost 427 jobs. Vale and Glencore are shedding 550 jobs at mines in the Hunter Valley and Queensland – the two big coal producing regions, where about 50,000 people work in the industry.
“The coal industry is undergoing a difficult transition and to be globally competitive we have to reset the cost base of the business,” said Dean Dalla Valle, president of BHP Coal, when he announced the decision to pull back activity at its Goonyella coking coal mine in Queensland.
BHP says restructuring will continue with coal producers facing challenges posed by low prices, high costs and a strong Australian dollar. Rio is on course to slash $1bn in costs from its energy division by the end of 2014.
Following a surge of mining investment over the past decade, coal production in Australia is forecast to rise to 372m tonnes in 2013-14, up 11 per cent on the previous year.
For Nathan Tinkler, the colourful Australian mining entrepreneur, coal’s woes mean this is the right time to be showering it with attention – and money
Record Australian production combined with a rise in exports from Indonesia – the world’s biggest seaborne exporter – and the US is causing global oversupply of thermal and coking coal.
The price of thermal coal, which is burnt in power stations to generate electricity, has fallen 45 per cent since 2011 to $73 a tonne. The price of coking coal, which is used in steel making, has fallen from about $300 in 2011 to about $120 a tonne, prompting an industry-wide shake out.
“I would estimate 13,000 jobs have been lost in the past few years,” says Michael Roche, chief executive of Queensland Resources Council, an industry body.
Mining industry data compiled by the council show a quarter of mines in Queensland are losing money. Glencore estimates that one-third of mines nationwide are in the red. In response miners are squeezing suppliers and trying to cut costs.
Mining services contractors are on the front line, a fact underlined by the collapse of the Forge Group, which went into liquidation in March owing creditors A$800m.
Until recently, miners had tried to ride out the price slump by cutting costs rather than mothballing or selling mines.
“A lot of the cost of production in coal is fixed in terms of port and rail access, which miners continue to pay even when they close an operation,” says Mr Roche.
These “take or pay” contracts were signed during the boom years when mining and energy companies committed to investing almost A$400m in coal, iron ore and liquefied natural gas projects. The rush to secure infrastructure to transport resources from projects, often in remote parts of Australia, on to ships to China and Japan has resulted in high-cost fixed contracts that are difficult to renegotiate.
“The miners do their arithmetic on whether it costs them more to keep a lossmaking mine open or to close it and continue to pay for rail and port access they aren’t using,” says Mr Roche.
But the prolonged downturn is forcing miners to act. This month US company Peabody Energy sold its Wilkie Creek mine to Australian entrepreneur Nathan Tinkler for $150m. Rio also finalised the A$1bn sale of its 50.1 per cent stake in the Clermont thermal coal mine in Queensland to a company jointly owned by Glencore and Japan’s Sumitomo Corp.
Rio and Glencore have been in talks about creating a joint venture for their Hunter Valley coal operations since at least last year, although no decisions have been taken on proposals that Credit Suisse forecasts could save $500m year.
In spite of the coal industry’s problems, Australian export volumes are likely to increase to 438m tonnes by 2018-19, as mines built during the boom come on stream and replace less efficient ones, according to Australia’s Bureau of Resources and Energy Economics.
BHP, Rio and Glencore say the medium- to long-term future for Australian coal is bright given rising demand in Asia. But attracting investors to finance new projects, including the A$30bn coal mines planned for the Galilee Basin in Queensland, will be tough and smaller companies will struggle.
“Smaller players rely on the share market for finance and there is little appetite from equity markets to invest in coal when the world is oversupplied,” says Daniel Morgan, analyst at UBS.
Indian companies Adani Enterprises and GVK, as well as Australian mining magnates Gina Rinehart and Clive Palmer, have proposed building huge coal mines in the Galilee Basin.
The projects are controversial because they require the expansion of Abbot Point port near the Great Barrier Reef. Conservationists say dredging and the dumping of mud within the reef marine park could harm the reef, which is protected by Unesco. Unesco is considering whether to place the reef on its list of world heritage sites “in danger”, though this week deferred a decision until next year.
Tinkler returns to the coalface: entrepreneur says assets are cheap
With coal prices under downward pressure amid global oversupply and some of the biggest mining companies busy trying to offload unprofitable mines, the commodity is looking distinctly unloved, writes Jeremy Grant in Singapore.
But for Nathan Tinkler, the colourful Australian mining entrepreneur, coal’s woes mean this is the right time to be showering it with attention – and money.
Last month he surprised the industry by buying Wilkie Creek, an idled Australian thermal coal mine, from Peabody Resources for $150m. That deal, part-financed by New York investment bank Jefferies, signalled what he describes as a comeback after two years out of the business.
That absence was enforced, after a disastrous A$5.3bn bid in 2012 for Australia’s Whitehaven Coal, which collapsed as coal prices fell and he was left owing millions of dollars to creditors.
Mr Tinkler has been lying low in Singapore since then, paying off creditors through asset sales – the latest being the disposal of his Patinack Farm horse stud. That was one of the last vestiges of a former high-rolling lifestyle as the richest man in Australia under 40.
My bet is that ultimately governments and consumers will become more aware of their emissions and air quality will ultimately become paramount
Mr Tinkler, 38, now says coal assets are cheap enough to warrant a return to the acquisition trail.
“It’s taken a while, I think, for the market to come back to where coal is really at. We’re only just starting to see people come out and say ‘we want to sell assets and we’re prepared to meet the market’,” he says.
“I think the mood seems to be right now that you’re starting to see the Chinese move in on [Australian iron ore producer] Aquila [Resources] and things like that so the long-term believers in the cycle, I think, are starting to move now,” he says.
One such fellow believer would be Mick Davis, the former Xstrata chief executive, who in March secured $2.5bn for new investments in the sector.
On the demand side, Mr Tinkler’s rationale for investing now in thermal coal assets is that the commodity, which burns cleaner than cheaper grades of coal, will be sought after as China implements policies to encourage use of lower-emission fuels to clean up the environment.
“My bet is that ultimately governments and consumers will become more aware of their emissions and air quality will ultimately become paramount. Japan burn a very high-quality clean coal and I think, ultimately, that’s what China will look to do where they can,” he says.
Many analysts agree Mr Tinkler’s timing may be right. But some point out that whether demand emerges as he hopes will come down to whether the rate at which China’s overall energy consumption will outpace the rate at which it switches from coal to other more environmentally friendly fuels, such as nuclear and gas.
Last week the International Energy Agency said Chinese demand for natural gas was expected to almost double in the next five years.
But Mr Tinkler argues there is still plenty of scope for thermal coal in China given the lack of gas infrastructure in place. “Thermal coal is a baseline product that’s needed in the world and we have a huge cost advantage over other potential sources of energy,” he says.
Meanwhile other deals are in the pipeline, although he declines to name any.
“Anything that comes out of the majors is obviously going to be very interesting. There’s a lot of assets out there in the thermal coal market that I think can probably be operated better.”
Macquarie Bank commentary May 1, 2014: “OAO Mechelis the latest miner to cut met coal production in North America, having announced on Tuesday that it is halting its Bluestone operations in West Virginia. In total, we estimate recently announced North American production curtailments amount to around 11mtpa. This is one reason we think spot price risk is starting to skew to the upside, but that further cuts are required to fully rebalance a global seaborne met coal market that was oversupplied by 25mtpa through January and February” TIG’sviewisthatotherrecentlyannouncedcurtailmentsandcutsbringthetotalcurtailmentstoaround20Mtpa.With50%ofglobalseaborneproductionrunningatcashlossesatcurrentcokingcoalpricesweexpectmorecutstocome–themarketisshiftingfromoversupplytodeficit
The quarterly benchmark price for metallurgical coal dropped to a six-year low, according to Doyle Trading Consultants LLC, amid a slowdown in Chinese demand for the steelmaking ingredient.
Australian coal producers and Japanese steel mills agreed to a fourth-quarter price of $119 a metric ton, down a dollar from the third quarter, Grand Junction, Colorado-based Doyle Trading said in a report yesterday.
Chinese imports in August were 39 percent lower than a year earlier, according to customs data, amid a glut of domestic steel. Iron ore demand is also suffering, with prices at a five-year low.
The coal settlement dashes hopes for a rebound in the price, which is down 64 percent since reaching $330 a ton in 2011. U.S. producers will have to continue focusing on cutting costs and potentially idling more unprofitable mines, said Daniel W. Scott, an analyst at Cowen & Co. in New York.
“We expect further met production curtailments to continue into 2015,” Scott said in a note yesterday.
Producers of coking coal, as the commodity is also known, have already announced as much as 30 million tons of production cuts this year, or almost 10 percent of global seaborne supply, St. Louis-based miner Peabody Energy Corp. (BTU) said Sept 18.
The latest contract price could have fallen to $112 because of a weaker Australian dollar, Doyle said. The fact that it didn’t may reflect concerns a steeper reduction would trigger another round of supply cuts before those already announced had time to take effect, Doyle said.
The “whisper number” for what the settlement would be was closer to $115 a ton, said Jeremy Sussman, an analyst for Clarkson Capital Markets in New York. While the metallurgical coal market is still weak, “the sky is not falling” either, he said in a note yesterday.
The Chinese price for iron ore is at its lowest since September 2009, according to data from Metal Bulletin Ltd. Global output of iron ore will exceed demand by 52 million tons this year and 163 million tons in 2015, according to Goldman Sachs Group Inc.
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Australian Coal Miners Cutting Costs Not Output as Rebound Seen
By James PatonOct 2, 2014 10:24 AM GMT+0900
Australia’s coal miners will weather a plunge in prices by cutting costs rather than production ahead of an anticipated market recovery next year, according to consultants Wood Mackenzie Ltd.
A forecast 3 percent gain in the price of coal used by steelmakers next year and a decline in the Australian dollar should help ease producers’ pain, said Ben Willacy, a Sydney-based analyst at Wood Mackenzie.
“We anticipate margins rising and profitability improving,” Willacy said in a phone interview. “We’re not forecasting closures, so our assumption is that Australian operators, even those operating at a loss, will continue to survive through the fourth quarter to be able to take advantage of better conditions in 2015.”
Producers from BHP Billiton Ltd. (BHP) to Glencore Plc (GLEN) have cut costs amid a global glut and slowing demand growth in China, factors that have pushed prices of metallurgical coal to the lowest since 2008. With freight contracts at some mines that make it cheaper to ship at a loss rather than close, Australian production is still forecast to climb this year.
Even after this week’s announcement of the impending closure of Sumitomo Corp. and Vale SA (VALE5)’s Isaac Plains mine, only three steelmaking coal mines have shut this year in Australia, the world’s biggest source of metallurgical coal.
That contrasts with the U.S., where Alpha Natural Resources Inc. idled three unprofitable mines in West Virginia last week and plans to cut production at eight more in November or December. There may be only two to four “really, really” large U.S. coal producers left as the industry shrinks, Alpha Chief Executive Officer Kevin Crutchfield said in an interview.
‘Unprofitable Mines’
While about 13 steelmaking coal mines in Australia are producing at a loss, putting them at risk of closing, most producers, including larger ones such as BHP’s venture with Mitsubishi Corp. (8058), are profitable, Willacy estimated.
Costs have declined 13 percent, while prices have fallen 24 percent, he said. BHP, the world’s largest metallurgical coal exporter, said the costs at its Queensland mines have fallen 40 percent from their peak.
“Cost cutting has been really successful, particularly for big operators, but prices have fallen by more than costs,” Willacy said.
A forecast drop in the Australian dollar to 86 U.S. cents by the end of 2015 will also help after the currency averaged about one dollar in the previous two years. It’s fallen about 8 percent in the past three months to 87.38 U.S. cents yesterday.
Benchmark coal prices are forecast to increase to $130 a metric ton next year from an average of $126 a ton this year, according to Wood Mackenzie’s revised estimates. It previously expected prices of $139 a ton next year. Prices will rise to $136 a ton in 2016, it forecasts.
‘Not Enough’
Should prices fail to rebound, Australian mines would probably have to make more production cuts and closures, Daniel Hynes, a commodity strategist at Australia & New Zealand Banking Group Ltd., said by phone from Sydney.
“We’ve been surprised by the lack of cutbacks so far considering the price is eating pretty heavily into the cost base particularly of the Australian producers,” Hynes said. “We’ve seen some cuts, but not enough to balance the market.”
Glencore said earlier this week it expects coal margins to lead to more mine closures.
Miners with high fixed expenses have opted to boost production to lower their unit costs, Hynes said. That has exacerbated the slump in prices, he said.
Freight contracts known as take-or-pay contracts, which make it cheaper to ship at a loss than to cut production, also encourage some mines to keep running, Wood Mackenzie says.
Australia’s metallurgical coal production rose by 16 percent to 184 million tons in the year through June and is forecast to keep growing, albeit at a slower pace of 1.2 percent a year through to 2019, according to the Australian government’s Bureau of Resources and Energy Economics.
Figures above are average quarterly export prices for metallurgical coal ('coking coal'; 'met coal') shipped from the USA expressed in USD per short ton on an f.a.s. basis [free alongside ship]. To see domestic US coking coal prices and / or other commodity price data including thermal coal, iron ore, ferrous scrap, natural gas and electricity prices, see our commodity prices page. Source: all figures above are courtesy of the EIA.
