Ex-China steel improving, but supply still sinking met coal

World ex-China steel production has shown more signs of life in the last month, with leading indicators suggesting growth should continue in 1H14.  This is a good sign for met coal, although a supply push into calendar year end has undermined quarterly benchmark prices to a new low of $143/t for Q1.  Prices should be better for Q2. 

Looking at some key regions, steel production in the EU is now quite a bit better than 2012 levels and on par with 2011.  These levels are still quite a bit lower than a few years ago and the current month is a seasonally slow part of the year.  But the start of next year should nevertheless be a noticeable improvement.

Key met coal importing countries like Japan, Korea and Taiwan have also been showing growth that should accelerate into 1H14, with leading indicators suggesting a pick up momentum which is better than the 2-3%YoY growth seen in the last few months.

So if ex-China steel markets are getting better and steel production in China is proving to be ok, why have prices drifted? Key problem is that supply growth continues to grow very strongly, particularly in the last 3 months or so. November exports look to be at similar levels as October.

The pace of growth in seaborne supply should slow quite a bit in 2014. The total seaborne market has grown by over 20mt in the year to October, but this should be more like 8mt in 2014.

This increase in supply could quite easily be absorbed by ex-China demand if consumption growth suggested by leading indicators of ~5% turn out to be correct.  For many countries, this wouldn't be too much of a stretch, with the EU and Korea still remaining below 2012 levels.

So it seems likely to me that China won't be getting any more extra supply of met coal from the seaborne market as it will for 2013. The big question mark is that if steel consumption is growing, can China satisfy additional demand purely through extra supply domestically and from Mongolia.  

Domestic supply has grown at ~3% this year, with import availability helping to satisfy much stronger coke demand of ~7%.  

Let's assume that steel production/coke demand increases by 4% in 2014.  Given that additional seaborne supply will be soaked up by ex-China demand, domestic supply will have to grow by ~4.5% to satisfy production needs.  

Chinese production has managed to expand despite much lower than expected prices this year.  But I think it is too much to ask for growth in domestic production to accelerate with higher prices. That should support better met coal prices than seen in the last 6-9 months.