 "Coking coal prices continue to work in steelmakers' favour")
Maria van der Hoeven, the executive director of International Energy Agency (IEA), has provided the answer as to why in spite of strong global demand for thermal coal used to produce electricity and coking coal, a major raw material for making steel, prices of the fuel have remained subdued.
According to Steel Index, part of Platts McGraw Hill, data, the FoB price of premium Australian hard coking coal, recently at $136.30 a tonne, is the lowest since August. Benchmark coking coal traded at $330 a tonne in mid-2011 in the aftermath of major floods that wrecked havoc in Australian mines and rail infrastructure. The IEA executive director says the price fall is due to the prospect of commissioning of 500,000 tonnes of thermal and coking coal production capacity every day for the next six years. Will low prices and capacity addition lead mineral groups to go slow in opening mines and expanding the working quarries? The answer is awaited.
The underlying message in a recent IEA report is the coal market is overwhelmed by too much supply. The Australian government says, the country's shipments of coking coal will rise to 178 million tonnes in 2015 from 145 million tonnes in 2012. The strength in Chinese production will also stand in the way of recovery in coal prices. High domestic production notwithstanding, Chinese steel-making coal imports in the first 11 months of 2013 were up 46.6 per cent to 67.38 million tonnes (mt). High coal imports were due to China lifting steel production between January and November by nearly eight per cent to 713 million tonnes. But, as is the Chinese practice, the country makes bulk purchases of commodities from iron ore to sugar, when its prices rule low to build strategic reserves.
Some of the lower-quality iron ores mined here have a higher-than-normal alumina content. The use of such an ore requires greater levels of heat and, therefore, burning of more coal. Low import cost should not, however, distract our steelmakers from scouting for foreign coal assets, now attractively valued. In the meantime, iron-ore prices, that sank to a low of $110.40 a tonne in May, have since gained 22 per cent.
The rise in ore prices of this order, as also Chinese imports reaching a record in November, has come as a surprise to Rio Tinto Chief Executive Sam Walsh. Chinese ore imports in the 11 months to November rose 11 per cent to 746 million tonnes. Ore stockpiles at 25 major ports in China in December-end were 85 million tonnes. China, which remains relentless in raising steel production even while phasing out high-cost capacity, has to put greater reliance on imports of iron ore, since domestic supply is falling short of requirements of its steel mills. Production cost in many of the mines in China being double that in Australia and Brazil, the country is better off by importing than raising local production.
Walsh predicts as "new capacity will be coming on next year, I expect iron ore prices will soften a bit. But it will still be a good business to be in". Efficient producers like Vale, Rio and BHP Billiton have their ore mining cost pegged at less than $55 a tonne. India, which till a few years ago was the world's third-largest exporter of ore, faces the prospect of remaining a net importer till the stalled mines resume normal production.
Whether it is Walsh or BHP CEO Andrew Mackenzie, China figures prominently in their mines development planning. Steel Authority of India Limited Chairman Chandra Shekhar Verma says, "For a major producer of steel or of steel-making raw materials, the important challenge is to anticipate correctly where the Chinese demand and production are heading. After all, China accounts for 65 per cent of the world's seaborne iron ore trade. Almost a third of global exports of coking coal are destined for China. Of the world's steel production of 1.448 billion tonnes in the first 11 months of 2013, China had a share of 712.864 mt."
Iron ore and coking coal are widely perceived as "proxies" for industrial and construction activities in the world's second-largest economy. Walsh may put up a brave face, but groups investing billions in raising mines capacity are concerned that China suffered a third straight annual decline in growth from 9.3 per cent in 2011 to 7.7 per cent in 2012 and to 7.6 per cent in the just ended year. Warnings that Chinese growth could suffer a further decline in 2014 will have their brow further furrowed.
According to Steel Index, part of Platts McGraw Hill, data, the FoB price of premium Australian hard coking coal, recently at $136.30 a tonne, is the lowest since August. Benchmark coking coal traded at $330 a tonne in mid-2011 in the aftermath of major floods that wrecked havoc in Australian mines and rail infrastructure. The IEA executive director says the price fall is due to the prospect of commissioning of 500,000 tonnes of thermal and coking coal production capacity every day for the next six years. Will low prices and capacity addition lead mineral groups to go slow in opening mines and expanding the working quarries? The answer is awaited.
| WHY COAL PRICES ARE SUBDUED |
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The underlying message in a recent IEA report is the coal market is overwhelmed by too much supply. The Australian government says, the country's shipments of coking coal will rise to 178 million tonnes in 2015 from 145 million tonnes in 2012. The strength in Chinese production will also stand in the way of recovery in coal prices. High domestic production notwithstanding, Chinese steel-making coal imports in the first 11 months of 2013 were up 46.6 per cent to 67.38 million tonnes (mt). High coal imports were due to China lifting steel production between January and November by nearly eight per cent to 713 million tonnes. But, as is the Chinese practice, the country makes bulk purchases of commodities from iron ore to sugar, when its prices rule low to build strategic reserves.
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According to RBC Capital Markets, coking coal prices will average $154 a tonne in 2014. For India, which imported 32.2 million tonnes of coking coal in 2012-13, low prices of the fuel is welcome news, not least because of the depreciation in rupee value vis-a-vis dollar. Our imports in the current financial year are likely to be higher, since the use of inferior grades of iron ore resulting from court-ruled restrictions on mining will lead to the burning of bigger amount of coking coal in blast furnaces to make liquid iron.
Some of the lower-quality iron ores mined here have a higher-than-normal alumina content. The use of such an ore requires greater levels of heat and, therefore, burning of more coal. Low import cost should not, however, distract our steelmakers from scouting for foreign coal assets, now attractively valued. In the meantime, iron-ore prices, that sank to a low of $110.40 a tonne in May, have since gained 22 per cent.
The rise in ore prices of this order, as also Chinese imports reaching a record in November, has come as a surprise to Rio Tinto Chief Executive Sam Walsh. Chinese ore imports in the 11 months to November rose 11 per cent to 746 million tonnes. Ore stockpiles at 25 major ports in China in December-end were 85 million tonnes. China, which remains relentless in raising steel production even while phasing out high-cost capacity, has to put greater reliance on imports of iron ore, since domestic supply is falling short of requirements of its steel mills. Production cost in many of the mines in China being double that in Australia and Brazil, the country is better off by importing than raising local production.
Walsh predicts as "new capacity will be coming on next year, I expect iron ore prices will soften a bit. But it will still be a good business to be in". Efficient producers like Vale, Rio and BHP Billiton have their ore mining cost pegged at less than $55 a tonne. India, which till a few years ago was the world's third-largest exporter of ore, faces the prospect of remaining a net importer till the stalled mines resume normal production.
Whether it is Walsh or BHP CEO Andrew Mackenzie, China figures prominently in their mines development planning. Steel Authority of India Limited Chairman Chandra Shekhar Verma says, "For a major producer of steel or of steel-making raw materials, the important challenge is to anticipate correctly where the Chinese demand and production are heading. After all, China accounts for 65 per cent of the world's seaborne iron ore trade. Almost a third of global exports of coking coal are destined for China. Of the world's steel production of 1.448 billion tonnes in the first 11 months of 2013, China had a share of 712.864 mt."
Iron ore and coking coal are widely perceived as "proxies" for industrial and construction activities in the world's second-largest economy. Walsh may put up a brave face, but groups investing billions in raising mines capacity are concerned that China suffered a third straight annual decline in growth from 9.3 per cent in 2011 to 7.7 per cent in 2012 and to 7.6 per cent in the just ended year. Warnings that Chinese growth could suffer a further decline in 2014 will have their brow further furrowed.