Metallurgical Coal: Mongolian imports to impact further on seaborne market in 2012

Metallurgical Coal: Flood premium has disappeared from hard coking coal market


The Queensland flood premium, which had sustained prices at elevated levels throughout 2011, effectively disappeared in 1Q12 with the settlement of premium hard coking coal prices (HCC) at US$235/t, a 17.5% decline from 4Q11.

While always expected as operating conditions in Queensland normalized in 2H11, price conditions weakened more rapidly towards the end of 2011 as improved supply in the seaborne market combined with weaker demand conditions in Western Europe and China, and a slow recovery in Japanese blast furnace output.

As a result, weaker coking coal and direct injection coal prices have weakened even more rapidly. For example, between 2Q11 and 1Q12, low volatile pulverized coal injection (low vol PCI) price settlements have fallen from US$275/t to US$172/t FOB Queensland, with the high-quality PCI discount to contract HCC widening from 16.7% to 26.7%. Discounts for semi-soft coking coals have increased from 20% to 33% over the same time frame.

Weakness in non-premium grades and high discount rates on high-quality PCI reflect aggressive pricing offers in standard and weaker HCC grades by Indonesian suppliers, relatively abundant Chinese domestic coking coal, and continued softness in Japanese demand for high-quality PCI coals.

Chinese metallurgical coal net trade balance

Metallurgical Coa: Mongolian imports to impact further on seaborne market in 2012


We expect these weakening price trends to continue in 2012 price settlements for all grades of metallurgical coal as further increases in Indonesian, Mongolian and Australian volumes overhang the market, amid improved rainfall conditions. As a result, we have lowered our contract HCC price forecast by 10.5% to US$221/t FOB. We have also lowered our low vol pci and semi-soft coking coal prices by similar percentages to US$161/t and US$148/t respectively.

Price prospects in the seaborne metallurgical coal market have not only been impacted by the reduction in seasonal weather effects and cyclical demand changes, but also by structural shifts in the balance between domestic production, overland and seaborne imports into China. On our estimates, Mongolian imports now account for 40% of Chinese imports and are depressing the growth in seaborne metallurgical coal imports.

With a further 6Mt of Mongolian imports into China forecast for 2012, the likely level of Chinese metallurgical coal production in 2012 and the level of US exports will be the arbiters of pricing and volume, in our view. With reconstruction largely completed in Shanxi province and production at record levels in 2011, and US exports to rise to 65Mt from 60Mt in 2012, we are forecasting a surplus of 6.7Mt in internationally traded market for metallurgical coal.

Metallurgical Coal GLOBAL SUPPLY AND DEMAND