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Met coal may follow thermal's quality refocus as prices down

By Hector Forster in London

May 21, 2013 - Shifting marginal demand from China and India into lower quality grades of thermal coal over the past few years has seriously hampered upward price momentum in spot markets, and now miners may now be reluctantly facing this trend for metallurgical coal.

Steelmakers globally have refocused their buying interest on met coals with weaker coking properties and higher volatile matter as they adjust their coke blends and lower their blast furnace operating rates.

These weaker met coals are available at lower prices than premium grades, as supply for most grades has outpaced demand in the short term, according to industry sources and analysts.

Iron ore too is seeing demand, particularly in China, for lower Fe grades, leading to narrower spreads between 62% and 58% iron fines.

Analysis continues below...

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Blends of PCIs with differing volatiles and impurities, use of pet coke for injection and as a coke constituent as well as anthracites and even some thermal-type coals are increasingly finding their way into coke or direct into blast furnaces.

Without the same demand growth for high coke-strength-after-reaction (CSR) low-vols, and steelmakers likely continuing to use as many alternatives as possible on tight margins, a similar situation of a downward shift in quality focus could linger.

China's steel output is moving towards bigger coastal blast furnaces and higher quality steels, requiring more of the high CSR imported coal to blend with domestic and other grades, which

could help reverse this trend eventually. For now, met coal prices have slid over several months and sources expect a gradual bottoming, rather than a price rebound.

Thermal coal less than half of record

Depressed thermal coal pricing could be a wake-up call for the met market.

Spot HCC prices are less than half record contracts in Q2 2011 at $330/mt FOB, while a year ago prices were well above $200/mt FOB when US miners eagerly signed new export contracts.

Newcastle spot thermal coal prices have been stuck below $100/mt for over a year, half the record price seen in 2008, despite huge annual import coal growth from China, India, and last year, Japan.

Marginal demand zeroing in on lower calorific value (cv) coals has led to more attention on newer price indexes such as for 5,500 kcal/kg NAR material from Australia into China, and similar bituminous and sub bituminous grades from Indonesia, South Africa, and the US into Asia.

Goldman Sachs had expected a rebound in coking coal pricing above $200/mt FOB Australia by 2015 but has now revised numbers: down to $164/mt for 2013, leading gradually up to $195/mt but not until 2017.

The steel raw material had long been accustomed to premium coal grades such as Peak Downs, Saraji and German Creek settled by Japanese or South Korean buyers making high-value steel products in sufficient tonnages to provide a global price marker.

Now, plunging spot prices in Australia separate premium low-vol and semi-soft coals by around $40/mt, halving the spread seen in May 2012 for top coking coals over material that can enter both thermal and met markets based solely through processing.

Premium low-vol HCC prices are the weakest in around six months, just above $140/mt FOB. (See related chart: Quality-related price spreads narrow as Prem LV prices fall).

But the spread with mid-vol HCC at $13.50 on May 17 is narrower than it was, as inferior quality is less penalized this time around.

In the US, high-vol B coals are holding their ground as US low-vol succumbs to more price competition from Canadian and Australian offers in the Atlantic.

The US low-vol and high-vol B spread reflecting Central Appalachian coals is currently just over $20/mt, half what it was in August 2012. (See related chart: Deteriorating premiums for spot US low-vol, high-vol A against HV B prices).

Buyers continue looking to cut costs, to introduce or use greater proportions of high-volatiles and semi-hards without the swelling or strength characteristics in traditionally prized coals.

Several buyers outside China that had used more premiums coals in the past stressed the need for lower raw materials costs to match weak steel pricing and demand.

Next page: Blast furnace operating rates, margins

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