Met coal prices are disastrously low at present, with spot markers for premium coking coal from Australia at sub $150/t. Relief doesn't appear to be coming anytime soon, with the summer slowdown likely to be painful for producers.
The first problem is that even though prices have been low for sometime, supply in the seaborne market has been strong. Exports from Australia, US and Canada, which make up the vast majority of the seaborne market, are up 7%YoY in the YTD.
While this growth isn't as explosive as other commodities, it is still way too strong in the context of demand. Crude steel production growth has been bad in key markets ex-China, with European markets down ~6%YoY YTD, while North Asia, India and Brazil are roughly flat.
This has meant that producers are increasingly having to push supply into China. As the chart on the left shows, China's share of exports has been rising significantly over the past 12 months.
While crude steel and pig iron production is stronger than expected in the year to date, domestic coking supply hasn't had to be particularly strong, thanks to the availability of imports and apparent stocking activity at the end of 2012. Looking at apparent production (estimated from coke production and net exports), domestic coking coal has risen a slow 2% YTD, although was strong at the end of 2012 where there appeared to be an apparent restock of coke by steel mills.
The challenge for the next quarter or so is that steel production growth will weaken given high levels of stocks and due to normal seasonality. With mills currently adequately supplied with coke/coking coal, its likely that coke demand will fall more sharply than steel, like it did in the summer of 2012.
So what need to happen to turn the fortunes around for met coal? The least likely driver would be an pick up in Chinese end use demand given where the risks to activity lie, so its either got to come from demand in the rest of the world, or supply.
There is some promise that Japanese steel production will improve, with met coal very much a beneficiary of a weaker Yen. The same cannot be said for the EU.
On the supply side, its really very strong US exports that need to drop out of the equation. There are some tentative signs that this is happening, but so far the response to low prices has been to produce more to reduce costs, rather than export less.
Finally China is making things tricky on the supply side given tax reductions on coke exports. This could help satiate rising Japanese demand, which would be bad news for the rest of the seaborne market.
So coking coal isn't likely to bounce any time soon, with producers needing to cut back supply more aggressively to bring balance and higher prices to this market.
