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Summary of Metallurgical Coal Market Outlook

Core Content

This document outlines the outlook for the metallurgical coal market, focusing on the three major players: Australia, the United States, and China. It discusses the current challenges in the market, including oversupply, low prices, and cost pressures, and provides forecasts for the period 2014–2017.

Main Points

1. Current Market Conditions

• Metallurgical coal prices have remained near multi-year lows due to oversupply and deflationary pressures.
• The recovery is expected to be modest, with prices likely to gradually rise toward the US$140/t estimate of marginal production cost.
• High-cost producers have shown surprising resilience, which has delayed the expected recovery.
• The price forecasts for premium hard coking coal have been downgraded for 2014–2017.

2. Australia: Leading Seaborne Producer

• Australian export volumes have increased by 27% from H1 2012 to H2 2013, despite low prices.
• Unit costs have declined by 39% in 2H 2013, driven by rising productivity and cost control.
• The Caval Ridge mine (5.5Mtpa) is expected to be commissioned in 2014, supporting export growth.
• The 2014–2016 growth projects will contribute to export expansion, but new investment is unlikely due to unsustainable prices.
• Productivity improvements are the main driver of cost reduction and volume growth.

3. United States: Marginal Supplier

• US marginal production costs are estimated at US$140/t, but spot prices are expected to gradually recover to this level.
• US exports declined by 5% in 2013, but we expect a larger decline of 8Mt in 2014.
• Freight costs into Asia and a strong US dollar have undermined competitiveness.
• US coal is sold at a 15% discount to premium hard coking coal due to lower quality.
• Costs fell by over 10% in 2013, but cost inflation is expected to return in 2015.
• Marginal producers may face operating losses in 2014, with a forecast of 8Mt of capacity closures in 2014 and 6Mt in 2013.

4. China: Buyer of Last Resort

• China is the largest consumer of metallurgical coal, with seaborne imports reaching a record in 2013.
• Domestic prices have fallen in line with seaborne prices, and demand has not been sufficient to tighten the market.
• Seaborne demand is expected to grow by 3.0% yoy in 2014 due to increased competitiveness.
• The degree of oversupply in China is expected to ease as domestic consolidation reaches its final stage.

Key Information

• Metallurgical coal prices are expected to recover gradually to US$140/t.
• Australia is the main driver of seaborne supply growth, with existing operations and new projects supporting export expansion.
• US is the marginal supplier, with high production costs and lower quality products leading to price discounts.
• China plays a critical role in the market, acting as the buyer of last resort but not sufficient to drive significant price increases.
• Productivity is the main factor in cost reduction and volume growth, particularly in Australia.
• Exchange rate movements and commodity currency depreciation have pushed US producers up the seaborne cost curve.
• Risk remains skewed to the downside due to limited mine closures and ongoing supply growth.

Price Forecast Summary

Conclusion

The metallurgical coal market is expected to see a modest recovery in the short term, driven by productivity gains in Australia and gradual price support from the US$140/t cost level. However, deflationary pressures and limited production cuts suggest that price recovery may be slow. China's demand is crucial for market balance, but its current level of demand is insufficient to significantly influence prices. Long-term supply growth is expected to moderate after 2015, with productivity becoming the main driver of supply expansion.