Met coal review 2013 and 2014

2013: Supply push into China sinks prices

Met coal prices continue to languish at the start of 2014 as the oversupply of seen over 2013 continues to weigh on markets.  While there are solid signs of better ex-China demand, the seaborne supply push into an overstocked Chinese market will continue to weigh on prices for a while yet.

It would appear at first glance that growth in met coal exports slowed at the end of 2013, but this masks actual availability.  In particular, Australian steam coal exports were incredibly strong in December at 19.4mt, with some met coal likely pushed into thermal coal markets.

There has been somewhat of a reduction in US exports, but this has been swamped by strong supply from Australia and Canada, with Russian exports also a bit stronger in 2013.

This additional supply has increasingly been pushed into China, with the proportion of exports from Australia and Canada making its way to China remaining very high at the end of the year.

This has been despite signs of much better steel production outside of China in the latter stages of the year. Key importers of coking coal like Japan, Korea and Taiwan have seen good YoY growth in the December quarter.

Europe has also been much better, with crude steel production above 2011 levels.

Leading indicators suggest that there hasn't been a loss of momentum in ex-China, so growth prospects for 2014 look pretty good.

The China part of the equation is more difficult.  Pig iron and coke production was reportedly healthy at the end of 2013, although things do appear to have slowed at the start of this year.

But the huge problem is that domestic coking coal production has been strong despite very weak prices.

So not only has China imported an additional net 26mt from the seaborne market + Mongolia, but apparent domestic supply has increased by ~18.5mt, or ~3.3%.

This has contributed to a big increase in coking coal inventory in China, which on some measures are at the highest levels on record.




Can the met coal market become more balanced in 2014?

Its unlikely that balance will come from a reduction in seaborne supply.  If anything, that will continue to increase, albeit at a much slower rate of ~8mt compared to +24mt seen in 2013.  This, however, should be absorbed by ex-China demand over the balance of year given the better momentum seen in key importing countries.

So the seaborne market and ex-China demand should be much better balance, with Chinese imports probably stable in 2014.

That means price direction will really be dictated by how well China can reduce current levels of oversupply and how strongly domestic supply will grow in the face of slower demand growth.

The strength of Chinese apparent domestic production at these price levels has been a huge surprise given where most believed cost curves were prior to this year.  Given the massive underestimation of China's ability to expand coking coal supply, how confident can we be about 2014?

There is a good case for Chinese coking coal supply to grow much more slowly, if at all.  But a prudent approach would be to see that start to happen rather than assume that it will.

If we start to see signs of this happening in the first quarter of the year, then coking coal should be on the path to much better prices in 2H14.  But for now its probably safer to assume that prices will remained mired in the doldrums.