Coking Coal Price Forecast 2015

Prices for metallurgical coal, or coking coal, have not been faring well lately. And while there’s some light at the end of the tunnel in the medium to long term, analysts don’t see the coking coal price forecast improving in the very near future.
Benchmark met coal prices hit a 10-year low in June, and more recently, Platts reported that US met coal prices continue to fall. Certainly, lower demand from the steelmaking industry has been hurting demand for coking coal, but there’s more to the picture. At the recent Coal Association of Canada conference in Vancouver, Joe Aldina of Wood Mackenzie gave a presentation outlining why met coal has been under so much pressure.
Aldina stated that while there has been some modest change relative to last year, “we’re not out of the woods yet” when it comes to oversupply.
“The problem before was oversupply, and right as part of that was being ameliorated, China pulled back from the trade. So that’s really been hurting us this summer,” he explained. “We also believe that met coal production in China has been rising slightly this year, so that throws that market out of balance.”

That said, Aldina also sees some Canadian production starting to push US supply out of the market, and he suggested that overall excess supply could potentially start to be removed from the market.
“US exports held up pretty well for the first half of the year, actually, but we’ve started to see them come off in June and July, and that’s encouraging,” he said. “So we think that we’re finally at that pivotal point this year with US supply, where 11 million tonnes drops out of the market.”
According to Wood Mackenzie, plenty of met coal supply is still underwater at current prices, and most of that is in the US as a strong US dollar has put added pressure on producers in the country.
Still, weak oil prices have allowed producers to bring costs down further than expected, keeping excess supply in the market longer. Furthermore, Aldina noted that the collapse of the ruble has allowed Russian material to flow into the market.
And, while China has plenty of loss-making met coal operations, Aldina explained that those won’t likely come out of the market anytime soon. “Probably about 250 million tonnes of domestic capacity in China we think is making a negative cash margin,” he said.
However, Aldina pointed out that plenty of that production is coming from state-owned enterprises. “So that production, while cashflow negative, is not necessarily coming out of the market,” he explained. “and we’re actually seeing production tick up slightly this year.”
On the demand side, India is buying more metallurgical coal. However, metallurgical coal imports into China are set to drop by an estimated 20 million tonnes in 2015, according to Wood Mackenzie, and the increase in demand from India isn’t expected to be enough to offset the situation.
“China’s pull back from the trade is just overwhelming other bright spots in the market,” he said.

Still, Aldina does see an end to cost cutting in sight. While he admitted that there is always a bit of a risk when it comes to foreign exchange rates, he suggested that mining costs in Australia won’t be able to go appreciably lower, noting that producers will need to “invest in some sustaining capital to keep their production going.”
“Our forecast is not for prices to jump because we don’t see the catalysts, but we see them incrementally improving,” he said. “So we think we can bounce back into the mid-$90 range by the end of next year, and over $100 in the year after that.”
Furthermore, despite US coal producers being under pressure, Aldina noted an “interesting bright spot” in that “US coals have been pricing at a significant premium” to other products, such as Australian met coals.
“The market is not just about economics. It’s not just about competition between players, because it’s not a fungible commodity,” Aldina explained. “Quality matters. Long-term relationships matter.”
Overall, he said that Wood Mackenzie doesn’t see the market coming back into full balance before the early 2020s. “Things do get better, it just takes a little bit of time,” Aldina said.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment in any company mentioned in this article.