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Events
Coal price surge squeezes steelmakers' profits www.asia.nikkei.com
BANGKOK -- The coal used to make steel, known as metallurgical or coking coal, has flummoxed pundits by emerging as the best performing global commodity so far in 2016 after years in the doldrums, with benchmark spot prices surging by more than 250%.
The soaring price of metallurgical coal, steel's second biggest ingredient, is hitting the margins of steelmakers in Japan and South Korea. These manufacturers have already been hurt by an abundance of cheap Chinese steel and the rising price of iron ore, steel's main input.
Mining restrictions imposed this year in China have helped push up prices, but authorities moved to relax some of those on Sept. 30, to help staunch any further rises.
Metallurgical coal spot prices for premium coal in Australia began the year at $77.50 and soared to $213. 40 by Oct. 4, according to Platts' The Steel Index, reaching its highest point since 2013. The Hard Coking Coal Index has also risen by 230%.
The effects of surging metallurgical coal prices have immediately been felt by Chinese steelmakers, who typically buy coal at spot prices. But the Chinese production cuts and increased imports have forced up prices for the rest of the world.
Mills in Japan and South Korea still use a hedging system that fixes prices for three months. This brings them certainty, but given the surge in coal prices, the next three-month price could be set at nearly double the current $92.50 per metric ton for premium coking coal, analysts estimated.
Japanese steelmakers including Nippon Steel and Sumitomo Metal, already hit by increasing cheap exports from China, are warning that such a rise in coal prices would have an impact on their margins. Japanese mills are already suffering from a strong yen.
Japan is the world's biggest buyer of metallurgical coal, importing 54.1 million metric tons in 2015, according to Morgan Stanley.
Nippon Steel & Sumitomo Metal's group pretax profit will likely drop 10% for the year ending in March, the company said. In July, it reported that for the April-June quarter, sales slipped 2% to about 4.8 trillion yen ($46.22 billion) from a year ago. That figure had not factored in the full extent of the coal price surge.
The main driver of events -- as with so many commodities -- is China, the world's largest steelmaker, and its overdue efforts to control domestic coal production and its inability to curb steel production in any meaningful way.
China has enormous coal and iron ore resources of its own but its mining processes are generally less efficient -- and more polluting -- than those in its major producing rivals, such as Australia.
At the beginning of 2016, China's economic planning ministry, the National Development and Reform Commission, commenced its coal industry reform to remove overcapacity and cut pollution by closing mines and enforcing industry consolidation. It also said no new mines would be approved until 2019.
The measures have cut coal production by 14% to 809.3 million metric tons in the April-June quarter, according to the Australia and New Zealand Banking Group. Morgan Stanley analysts said that the price of coal exports rose 20-50% in that quarter.
In recent months, those restrictions on domestic production have combined with unseasonal flooding in the major coal-mining areas of Shanxi, Guizhou and Inner Mongolia, to push up prices.
This has led to an increase in China's coal imports, both for metallurgical coal and thermal coal used for power generation and heating. In August, China's metallurgical coal imports rose 45% to 6.5 million metric tons from July.
Add to this equation a reduction in available offshore supply as coal mines have closed over the last few years, in part due to weaker demand from China.
Still, state-imposed restrictions are a heavy-handed tool and on Sept. 23, the NDRC held a meeting of representatives from the coal, power and steel sectors to consider tweaks to its capacity controls to free up more coal domestically.
"We will study and analyze the latest outlook in coal production, transportation, demand, price and problems," the NDRC said.
The thermal coal sector -- far more sensitive domestically due to power and heating imperatives -- gained some immediate concessions.
A week later, on Sept. 30, the China Iron and Steel Association, representing the nation's biggest mills, was handed some relief when the NDRC agreed to loosen restrictions on production controls, which will affect almost 800 coal mines, analysts at Macquarie noted. This included 350-380 million metric tons of coking coal capacity and "was the first signal from the Chinese government that it wanted to cool the metallurgical coal market."
Macquarie added that this now complicated the latest contract negotiations, about to get underway in Australia, noting that industry reports suggested there was still a gap of about $50 per metric ton between the expectations of steelmakers and coal miners.
Steel mills, led by Nippon Steel, are prepared to pay $160 per metric ton while miners, represented by Anglo American, are seeking $212 per metric ton. The world's biggest miner, BHP Billiton settles its price on shorter contracts outside the negotiations.
Still, in every market, there are winners and losers. In this case, metallurgical coal-mining exporters are winning. Australian miners sell about 50% of the world's exports with about half that mined by an alliance between Australian miner BHP Billiton, and Japan's Mitsubishi Development. The latest Chinese figures show that in August, imports from Australian miners rose 8% from the previous month while shipments from Mongolian miners leapt by 36%.
The Australian Treasury had budgeted for an average price of $91 per metric ton for the commodity for the financial year ending June 30 next year. Given the price surge, analysts predict that the average will come in much higher. The big question is how long such high prices can last in the sector, although that answer now lies in China.
Published Date:2016-10-07
