The key to get prices moving up again (outside potential weather disruptions) will be a lift in demand rather than cuts to seaborne supply. There are some positive signs from China and key North Asian importers that demand should lift to absorb stronger supply.
In some ways the strength in met coal exports is a weak comps issue, with growth not quite as aggressive against levels seen in 2011. And for Canada, some of this growth is making up for weakness earlier in the year, with YTD shipments up by less than 1mt.
Nevertheless, supply growth has been strong against a soggy demand background.
The US, however, does appear to be to reducing supply given the weakness. Shipments in Q3 were down 4%YoY in Q3, after falling 20%YoY in Q2.
Its apparent that US met coal is not able to compete into China at these levels against the strength of exports from Aus and Canada. And given the weakness elsewhere in the world, pushing supply into China has really been the only game in town for the year to date.
As shown on the chart on the left, US exports to China have dipped markedly as a share of the total. But Canada and Australia continue to push into China.
Indeed, 90% of the growth in met coal imports from Australia have gone to China this year. For Canada, there has been a huge shift in the mix of destinations, shipping an extra 2.2mt in the year to date.
As I've written about before, this supply push into China has helped take pressure off the Chinese domestic supply chain. October did see a slowdown in the growth of both coke and pig iron production, although is still at very strong levels. Indeed, coke prices in China have risen more recently.
Thanks to imports, apparent domestic coking coal supply has only had to be flat YoY to satisfy strong production.
Even these levels of domestic coking coal production are surprising given the level of prices and the previous assumptions about costs. But it appears that cost cutting has ensured current supply levels can be maintained.
The big risk for 2014 is that Chinese domestic production will have to lift. Firstly, even small growth in Chinese steel production will unlikely to be satisfied by seaborne market supplies at these levels, particularly if the US continues to withdraw.
Secondly, China will probably find greater competition from the rest of the seaborne market. In particular, leading indicators of key North Asia importers are pointing to a recovery in steel production as shown on the chart on the left. With Europe stable and Indian and Brazillian steel sectors performing better than their economies, its seems the met coal balance will be tighter next year.
