Coking coal prices to keep low in the long term

4th of 9, 2018

The US-China “trade war” has hurt Mongolia, too, in that our southern neighbour’s demand for coking coal has fallen. However, many analysts feel China will not have to reduce its steel output drastically, and based on that optimism, the market has been showing some positive signs, though this maybe more short-term than is good for Mongolian exports.

In the first quarter of the year, the average price of Australian coking coal was $220/t. It fell to $191/t in the second quarter, and even further, to stand at around $170/t at the end of July. Then, on 7 August, the price rose to $180/t, and has stayed put until the time of writing this, at the end of August. According to an article in Kallanish Commodities, “Steelmaking raw materials prices are being driven higher by the Chinese steel market and expectations that Chinese steel demand and output will remain high through the year. Steady signs that China is boosting lending to infrastructure projects and other investments to maintain economic growth is boosting outlook for steel in the second half.”

The price may be relatively good, but how much coking coal will China import? In the first half of the year, this was 29 mln tonnes, down 19.4% YoY, according to Fenwei Energy. At the same time Chinese domestic coking coal output was reduced while its crude steel production rose.

Chinese coking coal import (mln.tn)

H1 2017        H2 2017         H1 2018

36            34            29

Source: Fenwei Energy

Chinese domestic coking coal production was 214 mln tonnes in the first half of 2018, 11 mln tonnes less than in the same period last year. On the other hand, according to the World Steel Association, Chinese crude steel output in H1 2018 was 451 mln tonnes, 6.5% more than the 406 mln tonnes in H1 2017, which itself was 4.8% more than the figure for H1 2016.

According to Wood Mackenzie, there are two reasons why China is unlikely to significantly lower its import of coking coal. First, in a bid to tame air pollution, it is closing down or, at least, restricting production in, many of its own mines, and second, it is upgrading its steel production methods, which would require use of better quality coking coal.

Has Mongolia got the message that its coal for China has to be more environment-friendly, and had better not be transported by road? In Hebei province, which has the two major ports of Huanghua and Tangshan, it will be compulsory by 2020 to transport iron ore and coking coal by rail or waterways. Other provinces, including even those where coal is a major industry, are likely to follow suit. To retain its market share, Mongolia should shift to rail transportation as soon as possible.

A new major importer of coking coal has arrived on the scene. It is India, whose limited domestic output cannot meet its rising demand for coking coal. According to CRISIL Research, the country’s coking coal import would reach 58 mln tonnes by 2023, 11 mln tonnes more than in 2017-2018.   

Going back to the US-China trade scene, China has now imposed extra tariff on US coal, both coking and thermal, and all coke products. We have to wait to see what effect this has on US coal exports to China, which, in any case, is not much.  In 2017, China imported 2.8 mln tonnes of coking coal, 353,000 tonnes of thermal coal and 21,000 tonnes of coke products from the US, which means US products accounted for 4 percent of Chinese coking coal import, and only 0.2 percent of thermal coal and coke import. If the import prices after the new tariff are unacceptable to Chinese buyers, they have several others to turn to, Australia and Indonesia, for example.

According to the Resources and Energy Quarterly Report (June 2018) of the Australian Department for Industry, Innovation and Science, the average contract price for coking coal in 2018 is expected to be $197.6/t and this could fall to $153.5/t in 2019. Coking coal spot prices would reach $148/t by 2020. But there is enough ground to feel certain that with the demand increasing in India and some other countries, prices would remain higher than in 2015 when the average contract price of coking coal fell to just $102/t.

Source: IHS (2018); Department of Industry, Innovation and Science (2018)

Mongolian exporters should be prepared for no increase in Chinese coking coal import. Even if its steel production keeps growing, its domestic coking coal output would also rise, and its planned reliance on higher quality iron ore would mean consumption of less coking coal.