However, this price remains significantly above the marginal cost of production and longer-term drivers point to robust metallurgical coal demand in the Asia-Pacific market.
“Prices have started to fall from the last quarter and will continue to decline due to softening demand and the recovery of supply from flood-hit basins earlier in the year,” said Prakash Sharma, coal market analyst, Wood Mackenzie. “The weakening demand is largely attributed to the global macroeconomic slowdown which appears to have accelerated through the summer in much of the developed world. Leading industrial indicators suggest a sharp deterioration in manufacturing activity—reflected by the decline in global steel production.”
Despite near-term downward price movements, Wood Mackenzie says several factors have the potential to turn this trend. First, some mines have not fully recovered from the 2011 Queensland floods. The approaching wet season could lead to further delays in some mines attaining full production levels. Second, persistent worker-strikes at BHP Billiton Mitsubishi Alliance operated mines have the ability to tighten the market as these operations produce 26% of globally traded metallurgical coal. And last, U.S. low-vol met supplies have been curtailed by mine outages and changes in blending techniques following various mergers.
“Strong long-term demand is likely to support M&A [mergers and acquisitions] activity that has been ongoing since early 2008,” Sharma said. “Demand growth will be led by emerging markets with Asia accounting for 75% of global metallurgical coal demand by 2030. China and India will be key demand drivers, contributing to 60% of Asia Pacific’s total import demand.”
The bright spot amid the uncertainty continues to be the developing world, according to Wood Mackenzie. China, and much of Asia, will power ahead, drawing on growth drivers that have been deliberately de-coupled from troubled developed economies over the past couple of years.
China’s reliance on coking coal imports will increase due to insufficient supply of high quality coking coal in the domestic market. China is forging ahead with plans to close all blast furnaces under 1,000 m3 and install new blast furnaces with capacities in excess of 2,000 m3. The larger furnaces need coke produced from high-quality coking coal. As a result, a larger volume of this type of coal will be required and China will have to turn to suppliers of the likes of Australia, Mongolia and, to a lesser extent, Mozambique who are all expanding supply.