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Commodities Quarterly
16
19 April 2010
80 70 60 50 40 30 20 10 0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
10%
Spread to contract Coke (spot) incl. tax, ex-China Coking Coal (spot - estimate only) excl. tax, ex-Aust Coking Coal (contract) fob Aust
Demand back at peak levels With China steel production back near record levels China imports of coking coal have continued (imports totalling 7.5mt in the Jan-Feb) albeit at a less frenetic pace than 2H2009. This has coincided with a period of strong recovery in world ex China steel production. In December 2008 world ex China steel production fell to an annualised (seasonally adjusted) low of 525mtpa compared to a February 2010 rate of 750mtpa. The February steel run rate is up 43% from these lows and now in line with 2005 levels. As Figure 21 shows, steel production in the countries that drive the seaborne met coal market is now back at peak levels at a time when world ex China demand is still below historic levels. While Queensland weather has impacted Australian supply again (but not to the same degree as 2008), there are other fundamental drivers at work. Assuming continued ex China recovery/restocking in Japan, Brazil, EU as well as growth in India, Iran etc, then if Chinese mills remain in the seaborne market for +30mtpa then HCC tonnes will be as difficult to obtain in 2010 and 2011 as, perhaps, 2008.
Commodities Quarterly
19 April 2010
Weve updated our supply demand model for met coal with only modest changes. We can identify few greenfields tonnes with the key supply additions coming from swing producers like Canada and the US with Russia an additional supply source (see below). In terms of demand, we estimate that in 2010 and 2011 seaborne demand will increase by c13% and 10%. In 2010, we forecast seaborne demand of 255mt, a record level with 300mt being achieved in 2012. Supply - growth skewed to weaker coking coals Australia is the great hope for expanding greenfields tonnes. Port capacity constraints are being resolved with the new 30mtpa NCIG coal terminal now shipping. The Queensland government has given the go-ahead to the Northern Missing Link rail that will connect the Bowen Basin rail system to the Newlands rail system enabling Abbot Point to expand from capacity 25mtpa to 50mtpa. That said, greenfields HCC expansions remain a rarity. While we estimate that Australia can expand met coal exports by 45mt overt the period to end 2014, only 16mt of this is HCC, the balance is SSCC and PCI production.
First coal exports are due from Mozambiques Moatize Basin in 2011 and railways should be complete in Mongolia from Tavan Tolgoi and South Gobi to the Chinese border, enabling Mongolian exports to double. Russian met coal exports are expected to double off a low base and we expect these to be weaker coking coals. The combination of greenfields tonnes and swing production should be sufficient to balance the market in 2013. However, the market needs both higher cost swing production and greenfields production from new producers like Mozambique. Demand will be robust and any we believe the risks to our forecasts are the inability of the supply side to deliver as anticipated and the pricing risk to our forecasts is to the upside. China factors China warrants a special mention as it is a factor for both demand and supply. China is normally a supplier of coke to western world blast furnace operators. In 2007 and 2008 Chinas coke exports were, respectively, 15mt and 13mt. Given the collapse in western world steel production (and coke prices) in 2009, exports dwindled to 500kt. However, China coke exports have now picked up again given the weather related Australian port constraints (major coal producers declared force majeure given Queensland port closures in the last month).
Commodities Quarterly
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19 April 2010
McCloskey estimates that this month China will ship ca. 500kt of coke into the export markets. McCloskey estimates that coke prices for delivery into Brazil reached US$470/t in the final days of March with one Japanese steelmaker paying $500/t. There is a 40% tax on Chinese coke exports and with prices at $500/t the premium over domestic prices was RMB700/t. However, with weather impacts behind them, Australian exports will rise again and this should see coke export prices contract and reduce Chinas incentive to export. Mine closures in Shanxi impacted that regions coal production in 2009 (down 5% on 2008) and the Government has announced a plan to close a further 1,000 mines in 2010. The focus is moving from Shanxi to other provinces and in Henan there are estimates that over 600 mines will be closed this year. Given this backdrop we remain strong in or conviction that China will continue to be an importer and we assume that Chinas met coal imports remain at or above the 30mtpa level.
Figure 26: China coke production
China Coke production by region ('000 tonnes) Change % of total Province 2008 2009 2008 % yr/yr Hebei 38,737 48,003 24% 12% Shanxi 80,483 76,494 -5% 26% Inner Mongolia 13,708 18,344 34% 4% Liaoning 17,223 18,765 9% 5% Jiangsu 10,759 12,126 13% 3% Shandong 29,199 31,846 9% 9% Henan 18,467 21,631 17% 6% Sichuan 10,216 11,620 14% 3% Yunan 12,532 13,720 9% 4% Other 81,824 94,468 15% 26% Total 313,148 347,017 11% 100% Source: McCloskey (China Coal Monthly) / State Administration of Coal Mine Safety % of total 2009 14% 22% 5% 5% 3% 9% 6% 3% 4% 27% 100%
Market tightness to persist In terms our met coal supply-demand modelling little has changed. We continue to see modest market deficits through 2010-12 (Figure 28) and the real wild card will be China. In the first 2 months of this year, China has imported from Australia 1.9mt of HCC and 2mt of SSCC/PCI and given that Jan-Feb are weak months for China demand we could see China imports of met coal over 40mt this year!
Figure 27: China net coking coal imports
40 30 Millions of tonnes 20 10 0 - 10 - 20 2010F 2012F 2011F 2013F 1999 2004 2006 1997 1998 2000 2001 2002 2003 2005 2007 2008 2009
Net po sitio n
Commodities Quarterly
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Commodities Quarterly
11.7 37.5 18.1 13.5 6.0 1.8 2.7 2.5 1.0 57.2
19% 25% 21% 39% 20% 23% 14% 20% 20% 22%
6.1% 7.7% 6.6% 11.6% 6.3% 7.1% 4.4% 6.4% 6.3% 7.0%
Surpluses or deficit s show direction of the market although market should balance at the time Prices from 2010 onwards are average for CY based on quarterly prices
19 April 2010
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