Coking coal prices to fall as world demand softens

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PERTH ( − Coking coal prices could fall to below $240/t by the fourth quarter of next year, as demand softened and supply recovered from flood-hit basins in Australia, a Wood Mackenzie analyst said on Wednesday.

However, the price for the steelmaking ingredient would remain above the marginal cost of production.

Analyst Prakash Sharma attributed the weakening coking coal demand to the global macroeconomic slowdown in the developed world. “Leading industrial indicators suggest a sharp deterioration in manufacturing activity, reflected by the decline in global steel production.”

Senior economist Ed Rawle added that the global economy had entered a period of “extreme uncertainty”, with Wood Mackenzie downgrading its economic growth forecast for this year from 3.1% to 2.8%. It also slashed its forecast for 2012 from 3.7% to 3.6%.

Rawle stated that the unresolved eurozone debt crisis threatened to trigger a European banking crisis.

“Due to the sheer scale of the European banking sector, this is of major concern since it would likely lead to a global banking crisis with implications for us all,” he commented in a statement.

Despite near-term downward price movements, Wood Mackenzie predicted that several factors had the potential to turn this trend.

Rawle said that some mines had not fully recovered from the 2011 Queensland floods, adding that the approaching wet season could lead to further delays in some mines attaining full production levels.

Persistent worker strikes at the BHP Billiton Mitsubishi Alliance mines in Australia also had the ability to tighten the market as these operations produce 26% of globally traded metallurgical coal.

He added that mine outages and changes in blending techniques curtailed low-volatility supply from the US.

However, in the long term, investors were still energised by the coking coal space with high margins in a current supply-constrained world. “Strong long-term demand is likely to support merger and acquisition activity that has been ongoing since early 2008.”

Long-term demand growth would be led by emerging markets with Asia accounting for 75% of global metallurgical coal demand by 2030. China and India would be key demand drivers, contributing to 60% of the Asia Pacific’s total import demand.

“The bright spot amidst the uncertainty continues to be the developing world. Specifically, we see China and much of Asia powering ahead, drawing on growth drivers that have been deliberately decoupled from troubled developed economies over the past couple of years,” Rawle said.

Wood Mackenzie said that China’s reliance on coking coal imports would increase due to insufficient supply of high-quality coking coal in the domestic market, as it planned to close all blast furnaces under 1 000 m3 and install new furnaces with capacities in excess of 2 000 m3.

“The larger furnaces need coke produced from high-quality coking coal. As a result, a larger volume of this type of coal will be required and China will have to turn to suppliers of the likes of Australia, Mongolia and, to a lesser extent, Mozambique who are all expanding supply.”

Edited by: Mariaan Webb

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