Robust growth in demand from Asian economies, especially China, coupled with persistent infrastructural constraints on the supply side is likely to substantially harden international coking coal prices over the next 12-18 months.
Prices for the commodity, which accounts for about 40 per cent of the input cost in steel-making, have already increased by 35 per cent since October 2009 to $ 230 per tonne in May 2010.
With the effects of the global slowdown abating further, China's steel industry may well see a continuation of its steady run over the last two quarters going forward, on the back of its strong domestic economy. Recovering demand in overseas markets could also add momentum to the country's steel sector. Since early last year, domestic production of coking coal in China has been impacted by the closure of illegal coal mines, resulting in output falling to 380 million tonnes in 2009 from 387 million tonnes the year before. Simultaneously, driven by growing steel sector, the country imported an unprecedented 30 million tonnes of coking coal in 2009.
But with China's requirement for coking coal expected to increase at 8 per cent annually, as against the domestic production growth of 4 per cent, analysts have indicated that the considerable shortfall will support high prices for the commodity.
China, which consumes almost half the global coking coal production, will require to import about 50 million tonnes this year. Estimates point to another 70 million tonnes being brought into the country in 2011, which will account for about 23-25 per cent of the world's coking coal trade.
“The structural shift in China's position, and its emergence as a significant importer of coking coal, will push up prices further, and we believe that the 2011 average could easily be of the order of $280 per tonne,” CRISIL Research Head Sudhir Nair said.
At the same time, infrastructural bottlenecks in Australia, among the largest producers of coking coal globally, will also bolster prices in the short to mid-term.
“The primary cause for the price increase will be supply constraints that may persist over the next 2-3 years as railways and port capacities are improved. Steel demand will grow faster than (coking coal) supply,” Andreas Bokkenheuser, a coal analyst at UBS Bank in Singapore, told Business Standard.
Bokkenheuser said that while production could increase in China and the United States, the largest amount of growth in coking coal output was expected from Australian mines. “There are those many countries that supply the commodity,” he added.
Gujarat NRE Coke, one of the few domestic firms with coking coal assets in Australia, said that the there were significant limitations for transporting the commodity through railways from the pit-head to the ports.
“There is a strong infrastructure crunch in the Queensland, the main centre for coking coal production. Allocations in railways and ports is constraining actual export capacity,” the firm's managing director Arun Kumar Jagatramka said.
The volatility in prices of critical inputs, such as coking coal and iron ore, have driven international mining firms to enter into quarterly contracts with steel-makers; a model that has percolated into the model of domestic majors such as Tata Steel, which for the first time announced a move away from the annual benchmarking scheme earlier this month.
On Monday, though, Asian coking coal prices edged down as iron ore and steel prices plunged. Hard coking coal at Queensland was down by $1.50 per metric tonnes, while prices at China's Qingdao also fell by a similar margin.
