Unfortunately for met coal, steel dynamics in the world ex China is much more important to pricing than it is for iron ore. And for the most part the picture here has been bleak.
Europe has been and unmitigated disaster, although the optimist may point to the improvement in the comps in the last few month. That is, things are getting less negative and are at least stabilising.
Even more important are those countries which are entirely dependant on the seaborne market for coking coal, like key North Asian steel producers Japan, Korea and Taiwan, and India and Brazil. Over the past 12 months, these countries have been struggling from a macro economic perspective and that is reflected in steel production, which is broadly flat in the YTD.
So demand in the world ex-China is down. While most weren't forecasting great things for met coal outside of China, many weren't expecting it to be as much as a drag as it has been.
One area that has surprised to the upside is seaborne supply, particularly at depressed price levels. Supply from Australia, USA and Canada (which account for ~90% of the met coal market) is up 7.4%YoY YTD. All the growth has come from Australia, with the USA and Canada flat.
The biggest surprise continues to be the strength of US exports, which have maintained high levels despite the collapse in prices. While these levels of exports are almost universally accepted as unsustainable at these prices levels, they have been maintained for longer than expected.
The growth in Australian exports is perhaps less of a surprise, although the degree to which it has picked up is impressive. The gains appear to be almost entirely driven by BHP Billiton, which is the worlds largest producer of met coal by a long way.
Whats interesting is that even though they have a dominant market position, they have responded to the margin squeeze by pushing for efficiency gains. In some ways this has only taken them back to production levels seen in 2010. But it has involved closing some high cost operations and sourcing cheaper contractors to operate mines. So far they have been successful in driving efficiency improvements.
So with seaborne production up but ex-China demand falling, producers find themselves looking to market their coal into China. Here the problem is that the Chinese domestic market balance has not been so accommodating to a big increase in seaborne market supply.
While steel and pig iron production numbers are roughly around expected, the increase in seaborne availability has meant domestic production rates haven't been too challenging. Apparent coking coal production, which is back calculated from coke production and net trade, has only had to grow in low single digits to satisfy demand in the last few months.
This is even in light of weaker than expected production from Mongolia, with miner having huge problems with mining permits over taxation issues with the government. If Mongolian met coal availability had been better, prices would be much weaker again.
Compounding issues for met coal in the short term is the inventory cycle. While stocks of coke are considered to be reasonable, coke production is likely to fade fast into the weaker seasonal period around August/September as pig iron production tapers. This will at a minimum keep met coal prices low.
There are a couple of interesting lessons from met coal that will be important to keep in mind when thinking about iron ore.
1. Dominant producers still act like price takers: Met coal is a fairly concentrated market a few large producers dominating supply in Australia and North America. But even then, the largest supplier is willing to aggressively expand output in order to bring down costs.
2. Unsustainable can be sustained for longer than expected: The supply strength in US exports is a huge surprise at current prices, but US producers are pushing for volume in the face of ugly headwinds in pricing and domestic market pressures.
3. Don't forget about the rest of the world: While this is more important to met coal than other commodities, the traditional buyers output is not irrelevant, especially when these market are so marginal.
