As per some estimates, hard and semi hard coking coal trade volumes in the international market will rise from about 166 million tonne in 2009-10 to 186 million tonne in 2011-12 and to 279 million tonne in 2020. This means, considering a rather conservative estimate for China, which did not take into account the countrys current position in the coking coal market, the world will run short of hard and semi hard coking coal by as much as 26 million tonne in 2020-21.
It is worth remembering that China imported about 36 million tonne of coking coal in 2009 and has already booked, according to some sources, more than 24 million tonne in the first half of 2010. If the countrys coast based steel mills are to be run economically, they might go for much higher levels of imports. Even Indias potential is underestimated. If all the projects on paper are commissioned, the world coking coal market will go haywire. This means, coking coal will force technology change in the steel industry. There are not many options left either.
Alternatively, there will be massive exploration for such resources anywhere they are available.
The problem is that irrespective of the reserves position, what counts at this moment, is not that presently about 62% of the total coking coal that reaches the world market comes from Australia, but the fact that till 2020, nearly 58% of the incremental supplies are expected to come from Australia only despite massive efforts to explore and mine coking coal elsewhere in the world.
Thus, Australia will have an overwhelming play in the world seaborne trade of hard and semi hard coking coal. Indian steel makers will have to accept freight disadvantage if they have to depend on imports from Canada or the US.
This is bad news for steel makers in Japan, Korea and now China. Coking coal producers, like Australia, will have a commanding position in future price negotiations.
Also, the global coking coal market is oligopolistic and only a few players control most of the good resources.
Although huge price incentives have lured investors to explore and buy coking coal assets, the supply situation will not ease in the years ahead. Environmental regulations are getting increasingly stringent. This will hold back many potential opportunities. Further, shipping the coal out of the mines to the ports for overseas customers will require significant transport infrastructure to be built in some really complex terrains. Fortunately, a country such as Australia is not associated with any political risk. This may not be so in many countries where significant resources have been found recently.
Importantly also, coking coal locations in Australia are reasonably well explored. The best of the mines are either in operation or owned by the industry leaders. There are, therefore, only lower grade, smaller and more remotely located mines available today to bank upon.
This will also mean the average coking coal shipment cost will rise sharply from the current average cost of about $50-60 per tonne to more than $100 per tonne. Steel makers will have to look for corresponding increases in the price of steel to absorb the rising cost of coking coal. The miners, whether they are also steel makers, will have to take the medium and low grade assets seriously. With them, the steel industry will be able to hedge at least a part of the potential cost hike.
(These are authors personal views)