Met coal prices have been a bit weaker in the last month or so. While Chinese steel & coke production remains strong, steady domestic production and adequate supply from the seaborne market has meant that China has been able to satiate rising demand without putting any pressure on prices. Seasonality of supply might change that, but more important to the longer term is the return of ex-China demand. This is a strong possibility for Q1.
Chinese coking coal imports in September were huge, with seaborne imports close to record and a imports from Mongolia also bouncing in the month.
It has been much stronger import availability that has allowed China to expand pig iron/coke production without putting too much pressure on prices.
As the chart left show, coke production is now growing fast than pig iron production, as mills try to build inventory. This is the opposite of what happened this time last year as circled on the chart.
Apparent domestic production of coking coal, however, has barely grown YoY. It is somewhat surprising that coking coal production has been maintained at these levels given how low prices are, which is also a theme for thermal coal. To be sure, this year has proved that just about everyone misunderstood the cost structure of Chinese coal production and how flexible those costs proved to be when prices fell.
Perhaps prices would rise further if there was a greater requirement for Chinese production to increase. Some of that pressure over the next 12 months may come from stronger domestic consumption, which is likely to grow, albeit slowly.
Another key source of pressure is likely to come from the seaborne market competing for import tonnes. So far, key ex-China markets have been weak, with Europe shrinking and North Asia sluggish (partly thanks to rising crude steel exports from China).
But there are some small signs of improvement. Europe has at least stabilised is steel production, which should start to make more meaning YoY gains in the coming months
Other key coking coal import markets picked up in September after a poor August. Again, leading indicators here are a bit better.
This makes the prospects for Q1 interesting. Conceivably will be in a period where China is seasonally ramping steel production into mid year, with other key importers showing meaningful YoY gains. At the same time, seaborne availability is likely to be affected by the usual weather related constraints.
So I would expect prices to break out of their current doldrums in the next few months.
