As steel demand approaches pre-COVID-19 levels, the prospects for met coal and coke improve

by steve fiscor, editor-in-chief

Like many conference organizers, Smithers decided to host its Met Coke meeting as a webinar in mid-November. The discussion, sponsored by SunCoke Energy and promoted by Coal Age, took place in the span of a few hours over lunch on November 11.

The theme for the webinar was “The Impacts of COVID-19 and the Steps Toward Recovery.” It began with presentations from Dr. Joseph J. Poveromo, principal, Raw Materials & Ironmaking Global Consulting, who spoke about the factors affecting global economic growth and the met coke market. He was followed by Jim Truman, a metallurgical coal market analyst with Woodmac, who offered an outlook for global markets.

The speakers described how the pandemic impacted the met coal and coke markets worldwide. The situation in the second quarter of 2020 was dire. The disruption in the world economy impacted nearly every market, including steel mills and coal mines. The good news is that the steel market in general will recover much of its losses and regain momentum during 2021 as the economy recovers worldwide.

When one speaks in generalities about this market, however, they are mainly talking about trade between Australia and Asia, and China in particular. After all, the outsized levels of Chinese demand dictate the direction of the business, especially when it comes to prices, and lately, a trade dispute between Australian met coal suppliers and Chinese steel mills has upset the market fundamentals. It led to a glut of Australian met coal on the seaborne market, which depressed spot prices for certain coals. It also led to new opportunities for other met coal miners as China reached out to other suppliers.

Metallurgical coal prices enjoy a nice two-year rally until COVID hit.

Factors Affecting the Steel Market

Dr. Poveromo compared the COVID-19 pandemic recovery with the recovery from the global financial crisis and said he expects a sharp rebound, instead of the long slog. Citing statistics from CRU, he sees a swift recovery for gross domestic product (GDP) in the U.S. to pre-COVID-19 levels throughout 2021. The Eurozone growth momentum will be a little slower. GDP growth worldwide averaged 2% and 6% for China in 2019. “In 2020, average GDP worldwide contracted 4%, but GDP growth in China still managed to average 2%,” Poveromo said. “For 2021, GDP growth worldwide is expected to average 5% and Chinese GDP growth is expected to be 7%.”

Reviewing statistics from the World Steel Association (WSA), Poveromo
explained that worldwide steel demand for 2020 was expected to decline 2.4% to 1.73 billion metric tons (mt). In 2021, worldwide steel demand is expected to grow 4.1% to 1.80 billion mt. Steel demand in the largest market, Asia and Oceania, was expected to grow 2.1% in 2020 to 1.28 billion mt and then grow 2.5% in 2021 to 1.31 billion mt in 2021. Steel demand for North America and the European Union for 2020 was expected to decline 15% to 114.6 million mt and 134.3 million mt, respectively. The WSA forecasts a 6.7% improvement in steel demand for North America in 2021 to 122.2 million mt and an 11% improvement for the EU to 149 million mt.

For the first three quarters of 2020, according to the WSA, global steel production declined 3% to 1.32 billion mt. The 5% growth in China offset the double-digit declines in the EU (-17%), North America (-18%), India (-16%) and Japan (-19%).

Coke Production and Demand

Coke consumption is a function of steel production. “Although figures are not yet available for 2020, in 2019, Smithers estimated that Asian steel mills consumed 460 million mt of coke to produce pig iron,” Poveromo said. “China represented 371 million mt of that figure.” Steel mills in the CIS consumed 32.6 million mt of coke, followed by the EU (29.9 million mt), North America (12.6 million mt) and South America (10.1 million mt).

Coke is mostly produced and consumed in the same country, Poveromo explained. “Steel mills operate coke plants near the blast furnaces and coke is sometimes transferred to sister plants,” Pomerovo said. “The cross-
border coke trade typically only amounts to about 28 million mt.” The leading met coke exporters are: China (6.9 million mt), Poland (6.2 million mt) and Colombia (3.2 million mt). China is the largest seaborne exporter, while Poland is a major overland exporter.

With a long-standing deficit of domestic coke production, India and Brazil are major coke importers, Poveromo explained. “Malaysia, Vietnam and Indonesia have experienced a rapid growth in blast furnace production, which has not been matched by coke production growth,” Pomerovo said.

For 2020, Poveromo expects a sharp drop in global met coke trade to well below 20 million mt. “Some countries formerly importing incremental needs may need little or no outside coke,” Poveromo said. “India, for example, imported 1.6 million mt through September, compared to 3-5 million mt in earlier years. There may be permanent blast furnace shutdowns in the U.S. and Poland. As global steel production picks up, coke inventories will be drawn down before the coke trade picks up again.”

Working with Poveromo, Smithers recently published The Future of Metallurgical Coke to 2025, which examines the changing landscape and the impact new technologies will have on the met coke market. Pomerovo expects global coke production to recover to pre-2020 levels in 2022 with little change through 2025.

Global Met Coal Market Outlook

Truman described how global met coal markets enjoyed a run of a little more than two years before being shocked in 2020. “Prices tumbled during a horrible second quarter in 2020,” Truman said. “As the third-quarter recovery was developing, China up-ended the market with a ban on Australian coal imports. Then, it strengthened that ban.”

Comparing the prices for Australian low-vol met coals (LV), which have averaged about $205/mt from January 2016 to end of 2019, with marginal mine costs, it’s apparent that met coal miners were operating at a profit. Prices for U.S. high-vol A met coals (HVA) were also supported above the Australia spot prices.

U.S. met coal producers were forced to idle capacity last year. Despite current soft market conditions, coal companies are developing several new HV mines.

“Prices fell during the lockdown, then started to improve during September, and then the Chinese ban on Australian imports drove seaborne prices down again,” Truman said.

Early in the pandemic, every met coal producer had some form of closure, which led to a 4.5-million-mt loss through October 2020. Coronado idled its U.S. operations in March 2020 and later in the year, Peabody Energy idled its Shoal Creek operations. “Despite the production losses, three HV longwall mines are currently being developed in the eastern U.S.,” Truman said. “Each could be a 3-million-mtpy longwall operation and could add a sizable amount of HVA production over the next few years.”

U.S. met exports to Europe year-on-year through September fell by 24%, while Australia’s exports fell by 36%. “In a typical year, shipments from Australia and the U.S. to Europe are mirror images, as the EU steelmakers play coal suppliers off of each other,” Truman said.

Australia in general experienced less variation during the first three quarters of 2020, supported by China’s import appetite. During Q3 2020, Queensland’s met exports began to decline and then Australia learned of China’s soft ban on Australian coal, which caused upheaval in that market. More recently, China has turned to North American coal suppliers, paying a premium.

“We see a 33-million-mt 2020 trade loss in 2020 for the global met coal market and approximately 60% will be earned back by 2022,” Truman said. “Most of that loss is shared by the U.S. and Australia. Australia met exports will drop by about 14 million mt based on demand loss from the Chinese ban and a prolonged outages at Australian mines. U.S. met exports for 2020 will fall 8 million mt.”

The U.S. supply chain remains relatively tight. Since his November presentation, the market has continued to evolve. “The China ban has already lasted longer than we first expected and U.S. producers are getting a delivered price of more $200/mt to coastal mills.  Meanwhile, the ex-China market is still strengthening, which with tight supply, has driven FOB prices north since mid-January.  The seaborne spot price is exceeding $150/mt for U.S. HVA and U.S. LV.  So, a lot can happen in a few months.”

“Our long-term story, however, remains unchanged,” Truman said. “The global met coal market will rise to more than 400 million mt by 2040 on Indian growth,” Truman said. “Australia will capture most of the growth, with low costs and its proximity to India.”