You are on page 1of 5

19 April 2010

Export Metallurgical Coal


Raising forecasts, move to quarterly pricing
BHP Billiton-Mitsubishi (BMA) settled hard coking coal (HCC) prices for 2Q10 delivery at US$200/t (up 60% on JFY09 contract prices) in what was clearly a first timers discount to sign up takers to its new quarterly pricing mechanism. As Melinda Moore wrote in a recent note (Ferrous Bulk Pricing, 22 March 2010), the CS Global Mining Team has heard various non-BMA settlements including Queensland hard coking coal at US$250/t on both 3 and 12 month terms (up 100% on JFY09 contract); pulverised coal injection (PCI) coal at US$180/t (up 100%) and semi-soft coking coal (SSCI) at US$175/t (SSCC, up 110%). We have revisited our supply-demand analysis. This year we look for the coking coal market to be in a modest (theoretical) deficit with market tightness to persist through 2011. We expect quarterly prices to move from the $200 level to $230-$240 in the course of the next 12 months. Our quarterly price deck generates an average HCC forecast at US$200 for CY10 and US$220 for CY11 (increases of 21% and 25% respectively compared to our previous Japanese fiscal year based forecasts). Weve raised our low volatility PCI forecasts to US$150/t for CY10 and US$155 for CY11. Long run price estimates are unchanged. The key theme is that the combination of recovering world ex China steel production and ongoing Chinese steel expansion is stressing metallurgical coal markets given on-going supply constraints. While resurgent high prices will bring swing production back to the market and encourage expanded exports from Russia, we do not think it will be sufficient to meet market demand in the next 24 months and sustained high met coal prices will be the result.
Figure 20: Coking coal price forecast changes
Period HCC, Quarter prices Old US$/t 1Q-10 2Q-10 3Q-10 4Q-10 2010E 1Q-11 2Q-11 3Q-11 4Q-11 2011E 2012E 2013E 2014E, LT, real 125 170 180 190 166 190 175 175 175 180 168 158 140 New US$/t 125 220 230 230 201 240 220 220 220 225 189 170 140 Chg % 0% 29% 28% 21% 21% 26% 26% 26% 26% 25% 13% 8% 0% PCI, Quarter prices Old US$/t 85 140 140 140 126 140 135 135 135 136 131 123 105 New US$/t 85 170 170 170 149 170 150 150 150 155 136 131 110 Chg % 0% 21% 21% 21% 18% 21% 11% 11% 11% 14% 4% 7% 5% SSCC, Quarter prices Old US$/t 80 135 135 135 121 135 130 130 130 131 126 118 100 New US$/t 80 165 165 165 144 165 145 145 145 150 131 126 105 Chg % 0% 22% 22% 22% 19% 22% 12% 12% 12% 14% 4% 7% 5%

Source: Company data, Credit Suisse estimates

Commodities Quarterly

16

19 April 2010

Figure 21: Monthly steel output world


140 120 Raw steel output (mt) 100 80 60 40 20 0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 40%

Figure 22: Monthly world ex-China steel production

Crude steel output (millions of tonnes)

30% 20% 10% 0% -10% -20% -30%

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

40% 30% 20% 0% Change YoY (%)


17

10%

-10% -20% -30% -40% -50%

China Steel Western world steel

E Europe/CIS steel World % chg YoY

Source: Datastream, Credit Suisse estimates

Source: IISI, Credit Suisse estimates

Figure 23: Steel production - major coking coal importers


90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 Jan-98 Jan-97 Jan-96 Jan-95 Jan-94 Jan-93 Jan-92 Jan-91 Jan-90 China Other (EU15, Korea, Taiwan, Japan) Year on year change (%) 40% 30% 20% 10% 0% -10% -20% -30%

Figure 24: Implied coking coal price in China


800 700 600 500 400 300 200 100 0 -100 Feb 01 Feb 02 Feb 03 Feb 04 Feb 05 Feb 06 Feb 07 Feb 08 Feb 09 Feb 10 US$/t

Spread to contract Coke (spot) incl. tax, ex-China Coking Coal (spot - estimate only) excl. tax, ex-Aust Coking Coal (contract) fob Aust

Source: IISI, Datastream, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

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.

Figure 25: Australian exports by port


200 Australia coal output by port (mt) 180 160 140 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 Hay Pt HCC Abbot Pt HCC Gladstone semisof t NCIG s emisoft Dalrymple Bay HCC Hay Pt s emis of t Abbot Pt s emis of t Gladstone HCC Dalrymple Bay Semisof t PWCS s emis of t

Source: Company data, Credit Suisse estimates

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

18

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%

Source: McCloskey Coal, Credit Suisse estimates

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

Ex po rts o f co king coa l

Impo rts of co king coa l

Net po sitio n

Source: McCloskey Coal, Credit Suisse estimates

Commodities Quarterly

19

Commodities Quarterly

Figure 28: Coking coal supply-demand summary


COKING COAL EXPORTS Australia % change YoY USA % change YoY South Africa % change YoY Indonesia % change YoY Canada % change YoY Poland % change YoY China % change YoY Colombia % change YoY Russia % change YoY Mozambique % change YoY Mongolia % change YoY Other Total Coking exports % change YoY WORLD BOF& OHF CRUDE STEEL PRODUCTION % change YoY COKING COAL IMPORTS Europe % change YoY Asia % change YoY Asia ex China, India % change YoY India % change YoY China % change YoY North America % change YoY Central and Sth America % change YoY CIS % change YoY Other Total Coking Coal Imports % change YoY Annual change Supply Surplus/(Deficit) Surplus/deficit as % of exports Price (US$/t) 2001 106.2 9% 23.1 -22% 3.9 56% 4.7 21% 26.9 -4% 3.8 -34% 12.5 81% 1.5 150% 10.2 40% 0.0 7.8 201 5.0% 564 0.8% 59.4 -2% 107.1 1% 95.3 0% 11.5 1% 0.3 13% 7.1 27% 15.5 13% 6.2 55% 5.3 201 5.0% 9.5 0 0% 43 0.0 9.6 194 -3.5% 598 6.2% 54.5 -8% 106.3 -1% 92.1 -3% 13.9 21% 0.3 -5% 7.9 11% 14.0 -10% 5.9 -5% 5.0 194 -3.5% -7.0 0 0% 48 2002 104.4 -2% 19.5 -16% 3.1 -21% 3.4 -28% 23.0 -14% 3.5 -8% 16.4 31% 1.5 0% 9.2 -10% 2003 111.5 7% 20.0 3% 3.9 26% 2.2 -35% 23.7 3% 2.7 -23% 16.0 -2% 1.7 13% 12.6 37% 0.2 9.0 203 5.0% 680 13.6% 54.9 1% 113.8 7% 95.6 4% 15.6 12% 2.6 916% 6.7 -15% 14.5 4% 7.9 34% 5.5 203 5.0% 9.7 0 0% 46 2004 116.7 5% 24.3 22% 4.3 10% 2.9 32% 23.8 0% 3.0 11% 12.7 -21% 2.0 18% 17.0 35% 1.2 11.6 218 7.4% 709 4.2% 62.2 13% 118.6 4% 94.8 -1% 17.0 9% 6.8 162% 7.1 6% 16.5 14% 9.6 22% 4.3 218 7.4% 15.0 0 0% 59 2005 124.9 7% 26.0 7% 2.6 -40% 5.2 79% 26.7 12% 3.2 7% 10.2 -20% 1.9 -5% 15.3 -10% 1.8 11.2 227 4.1% 780 10.0% 64.6 4% 123.3 4% 95.2 0% 20.9 23% 7.2 6% 8.0 13% 16.6 1% 9.2 -4% 5.5 227 4.1% 8.9 0 0% 125 2006 124.4 0% 24.9 -4% 2.4 -8% 6.2 19% 24.6 -8% 3.6 13% 8.8 -14% 2.3 21% 13.9 -9% 1.7 -4% 12.9 224 -1.4% 852 9.3% 67.4 4% 118.5 -4% 92.6 -3% 21.2 1% 4.7 -35% 7.9 -1% 15.6 -6% 9.7 5% 4.9 224 -1.4% -3.2 0 0% 115 2007 137.9 11% 29.3 18% 2.2 -8% 6.4 3% 26.6 8% 2.4 -33% 5.3 -40% 2.1 -9% 13.3 -4% 2.3 35% 13.4 239 6.7% 933 9.5% 69.8 4% 127.9 8% 96.7 4% 25.0 18% 6.2 32% 7.0 -11% 17.9 15% 11.2 5% 5.1 239 6.7% 14.9 0 0% 98 2008 134.6 -2% 38.7 32% 2.5 14% 5.5 -14% 27.0 2% 1.6 -33% 3.5 -35% 2.1 0% 13.6 2% 3.7 57% 10.5 240 0.3% 904 -3.1% 68.0 -3% 128.6 1% 93.4 -3% 28.3 13% 6.9 11% 7.7 10% 18.9 6% 11.2 105% 5.2 240 0.3% 0.7 0 0% 305 2009F 135.2 0% 34.5 -11% 2.0 -20% 6.0 9% 21.4 -21% 1.0 -38% 0.6 -82% 2.0 -5% 13.2 -3% 3.0 -17% 10.0 226 -5.7% 867 -4.2% 50.0 -26% 138.0 7% 74.0 -21% 29.5 4% 34.5 400% 6.0 -22% 17.0 -10% 10.0 -11% 5.0 226 -5.7% -13.6 0 0% 125 2010F 136.0 1% 40.0 16% 2.5 25% 6.0 0% 27.0 26% 1.3 30% 1.0 56% 2.0 0% 17.0 29% 5.6 84% 15.6 248 9.9% 978 12.9% 59.8 20% 150.3 9% 85.7 16% 34.5 17% 30.0 -13% 7.9 31% 19.8 16% 12.0 20% 5.0 255 12.7% 28.8 -6 -3% 201 2011F 146.0 7% 40.0 0% 2.5 0% 6.0 0% 30.0 11% 2.0 54% 1.0 0% 2.0 0% 21.0 24% 6.0 12.2 119% 28.2 279 12.2% 1,063 8.7% 65.7 10% 166.8 11% 93.9 10% 40.9 18% 32.0 7% 9.1 15% 21.0 7% 13.6 13% 5.0 281 10.4% 26.4 -3 -1% 225 2012F 151.0 3% 38.0 -5% 3.0 20% 6.0 0% 31.0 3% 2.0 0% 1.0 0% 2.0 0% 25.0 19% 10.0 67% 18.3 49% 38.3 297 6.6% 1,118 5.2% 68.2 4% 179.1 7% 101.0 8% 44.1 8% 34.0 6% 9.5 5% 21.7 3% 14.0 3% 6.0 299 6.2% 17.4 -1 0% 189 2013F 169.0 12% 35.0 -8% 3.0 0% 6.0 0% 31.0 0% 2.0 0% 1.0 0% 2.0 0% 23.0 -8% 10.0 0% 20.2 11% 40.2 312 5.0% 1,162 3.9% 71.5 5% 187.8 5% 103.8 3% 48.0 9% 36.0 6% 9.7 2% 22.5 3% 14.5 3% 6.0 312 4.5% 13.3 0 0% 170 Chg (mt) 10-13 33.0 -5.0 0.5 0.0 4.0 0.7 0.0 0.0 6.0 10.0 14.6 24.6 63.8 183.4 262% 158% 26% 19% 53.5% 37.1% 7.9% 5.9% Chg (%) 10-13 24% -13% 20% 0% 15% 54% 0% 0% 35% CAGR 10-13 7.5% -4.4% 6.3% 0.0% 4.7% 15.4% 0.0% 0.0% 10.6%

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

Source: Credit Suisse estimates

19 April 2010

20

You might also like