Demand, supply bottlenecks to keep prices high over 12-18 months.
Robust growth in demand from Asian countries, especially China, and supply-related infrastructure constraints, are likely to substantially harden international coking coal prices over the next 12-18 months.
The price of the commodity — which accounts for about 40 per cent input cost of making steel — has risen 35 per cent since October 2009 to $230 per tonne.
With effects of the global slowdown abating, China’s steel industry may see continuation of its steady run over the past two quarters, on the back of its strong domestic economy. Recovering demand in overseas markets could give momentum to the country’s steel sector.
Since early last year, domestic production of coking coal in China has been impacted by closure of illegal coal mines, resulting in output falling to 380 million tonnes in 2009 from 387 mt the year ago. Driven by the growing steel sector, the country imported an unprecedented 30 mt coking coal in 2009.
And, with China’s requirement of coking coal expected to rise eight per cent annually, as against the domestic production growth of four per cent, analysts say the considerable shortfall will support high prices. China consumes almost half the world’s coking coal and will have to import about 50 mt this year. Estimates point to another 70 mt being brought into the country in 2011.
“The structural shift in China’s position and its emergence as a significant importer of coking coal will push prices further. We believe the 2011 average could easily be of the order of $280 per tonne,” said Crisil research head Sudhir Nair.
Supply snags
At the same time, infrastructure bottlenecks in Australia, among the largest producers of coking coal globally, will bolster prices in the short to medium term. “The primary cause will be supply constraints that may persist over the next two to three years, as railway 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.
He said while production could increase in China and the US, the largest growth in coking coal output was expected from Australian mines. “There are not many countries that supply the commodity,” he added.
Gujarat NRE Coke, one of the few domestic firms with coking coal assets in Australia, said there were significant limitations in transporting the commodity through rail (from pit-heads to ports). “There is a major infrastructure crunch in Queensland, the main centre for coking coal production. Allocations in railways and ports is constraining export capacity,” said the company’s managing director, Arun Kumar Jagatramka.
The volatility in prices of critical inputs such as coking coal and iron ore have driven international mining companies to enter into quarterly contracts with steel makers. This 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 system 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 $1.5 per metric tonne, while prices at China’s Qingdao also fell by a similar margin.
