VANCOUVER – Talk of coal usually focuses on the thermal variety – the lower-carbon black rock burned in generators to produce electricity – to the neglect of the higher-quality variety used in steelmaking. The focus makes sense: the world churns through 860 million tonnes of thermal coal every year compared to just 275 million tonnes of metallurgical coal, so the thermal market definitely carries more weight.
That doesn't mean the metallurgical market is boring. Met coal is a necessary component in steel production, which means demand reflects global industrial health. Met coal is also less common – only four countries produce more than 75 million tonnes a year – and that means it is regularly shipped around the world to supply the world's big steel producers: China, Japan, South Korea, the EU, and India. Thermal coal, by contrast, usually only ships regionally.
And met coal is more valuable. At the moment thermal coal is garnering roughly US$90 per tonne on the spot market, though exact prices vary according to coal quality. Metallurgical coal prices vary similarly but the current spot market average is $160 per tonne, within the normal 50 to 100% markup from thermal coal pricing.
However, met coal prices are a far cry from a few years ago. In 2008 prices stayed comfortably above $300 per tonne for most of the year. The economic crisis pulled prices down for a period, but they recovered rapidly. In fact, at one point in 2011 met coal fetched US$400 a tonne.
Then China's slowdown took effect and took the wind out of global steel demand. As a result, met coal demand dwindled and prices plummeted. In late 2012 demand started to recover, but not until met coal prices found a bottom at $140 per tonne in the third quarter.
So where is the market going from here? It's a question sparking much debate.
In general, global steel demand is expected to resume its steady climb of roughly 3% annually, propelled by the push to industrialize vast swaths of the developing world. Met coal demand tracks steel demand very closely. As such, many forecasters are predicting that met coal prices will increase slowly and steadily over the next 24 months.
Goldman Sachs, for instance, expects met prices to average US$178 per tonne in 2013, rising to US$195 per tonne in 2014. Many other analysts have made similar predictions.
The tricky part is coal's supply-demand-price tango. At its base, the dance is much like that around any other commodity. Prices fall when there is too much supply, rendering some operating mines uneconomic and making new mine builds or planned expansion very difficult to finance. As a result, output soon drops. When output drops too far and there is not enough supply to meet demand, prices start to climb again.
That's the normal part. With met coal, however, demand depends on steel consumption – and steel consumption depends on global economic health. With the European Union and the United States in economic stasis, both trying desperately to stay afloat despite excessive debt burdens, steel demand growth in the West is muted or nonexistent. As with so many resources, steel demand growth in the coming years will come almost exclusively from the blossoming economies of Asia.
China has topped lists of steel production and consumption for years already and is expected to retain its title as the biggest steel producer in the world for many years to come. However, over the next few years another nation is expected to take over the mantle as the fastest-growing producer of the metal.
India's steel capacity could almost triple between 2010 and 2020 to reach 179 million tonnes a year, according to one of the country's top steel executives. That still pales in comparison to China's current capacity of 850 million tonnes per year, but most analysts do not expect Chinese capacity to climb beyond 1 billion tonnes a year anytime soon because its markets are already oversupplied.
With its steel capacity climbing only slowly, growth in Chinese coking coal demand will be limited. And China will likely be able to meet that demand growth from neighbouring Mongolia, which is bringing new mines into production and currently lacks the infrastructure to send its coal anywhere other than China.
India is not so lucky. India imported 31.8 million tonnes of met coal in fiscal 2012; this year the country will probably need 37 million tonnes. And if the country's steel capacity grows at anywhere near the expected rate, Indian met coal demand will probably double over the next few years. Since its domestic reserves are almost all the thermal variety, the global market will have to supply Indian met coal needs.
So: will the world's met coal producers be able to meet growing world demand over the next decade?
Maybe, and maybe not.
Put another way: supply will rise to meet demand, but only if the price is right. And where prices are heading depends on a few wildcard variables within that supply-demand-price dance.
Mozambique is one of those wild cards. Mozambique figures prominently in coking coal outlooks: the south African nation has ambitious plans to boost met coal exports from 4 million tonnes today to 100 million tonnes within a decade. If the country manages even half of that goal, the global met coal market will be well supplied.
But to get even halfway would be a miracle, as Mozambique is almost bereft of the necessary port and rail infrastructure. It seems likely that Mozambique's coal exports will grow to 20 million tonnes within a year or two and then flatline, held back until complicated rail lines across mountains and floodplains can be engineered, funded, and built.
So if Mozambique cannot provide India with enough met coal, can Australian supplies suffice? Perhaps, but low met coal prices, a strong Australian dollar, and increased taxes and royalties in the Land Down Under are straining the economics of building new mines or expanding old ones.
Australia is ramping up production. In 2012 the nation increased exports by 9% to 145 million tonnes; in 2013 exports are expected to climb another 11% to reach 161 million tonnes.
But those increases won't sate Indian coal thirst, if India's steel market takes off as expected. And with China absorbing all of Mongolia's output, Mozambique output growth capped for years by insufficient infrastructure, and low prices leading to production cuts across the United States, it seems likely met coal demand will outpace supply in the coming years, pushing prices back up.
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