China may cause coking coal prices to rise more than expected. The country could have imported about 36 million tonne of coking coal last year. The same may touch, or even exceed, 40 million tonne this year, depending on how much steel China will produce. Apart from the fact that the country?s own coal resources will lie underutilised due to forced closures because of frequent accidents in the mines, the country?s new steel mills, located mostly in the coastal areas will find it more economical to import coking coal. The Chinese companies have acquired some assets themselves in countries such as Australia and several of them will be in a position to supply some good quantities to the mills in China. However, this will not be sufficient. The country will increasingly depend on imported coking coal to run their massive blast furnace-based steel plants.
China has a strongly growing steel market and in all likelihood the market will maintain a decent growth this year too. They also have more production capacity than their own market can absorb. This means, the country will maintain a high production level. Today, they are desperate to sign iron ore contracts. It is also possible that with the possibility of being the second largest coking coal importing nation, they will play a very active role in the contract negotiations for coking coal this year.
It is obvious, therefore, the global coking coal mart is on fire. While China will try procure coking coal from all possible sources, as also others, the fight for Australian hard coking coal will be intense with the three major importing countries?Japan, China and India?lined up to chase every tonne of coal in that country. Needless to mention, Australia provides a massive freight advantage which these countries in Asia cannot afford to ignore. But, the supply side story of the coking coal market is a bit worrying. Infrastructure constraints and lack of adequate logistics, manpower and equipment may not support a higher levels of mining and a free flow of mined coking coal out of Australia. Further, with the coking coal mines being controlled by oligopolists like BHP Billiton and Rio Tinto, it will not be as easy for the steel makers to get past the pricing barriers so easily.
The current contract for the best quality reference coking coal is set at a price of $129, fob, Australian port. The US dollar has weakened significantly over the year and the dollar denominated price for this year?s supplies will be higher on that account itself. The current spot prices are at about $180 per tonne. This means, the contracts are unlikely to be signed below that. On top of that, if the Chinese steel makers show aggression, the price can easily overshoot the current spot levels and touch a high of $200 a tonne, if not in the contracts, later in the spot businesses.
The steel makers wherever they are will first seek to ensure supplies. They will also accommodate operational changes to raise the use of PCI. But, at the end of the day, all such substitutes of hard coking coal in the blast furnaces, will follow the same trend in price. In the beginning, others may lag behind. But, by the turn of the year, one will see even PCI surging ahead not differently.
The coking coal problems will persist for the steel makers beyond this year. China and India are adding more and more capacity with blast furnace iron making. Over 70% of the new capacity to be added in China are coast- based and over 90%of the same are blast furnace-based. Similarly, over 90%of the new capacity to be added in India will require coking coal. This certainly does not provide any comfort to the Indian steel makers. The steel prices are strong today in India. But, they are nothing to write home about. With the added potential burden of a rising ocean freight rate, the coking coal costs to the Indian steel makers may turn out to be significant.
These are personal views of the author
