Let the good times roll. That was the message for coking coal miners out to the end of the decade from presenters and delegates at the Coal Association of Canada Conference 2017 in Vancouver, "We are in the good times, they are likely to last three to five years," Neil Bristow, managing consultant at H&W Worldwide Consulting said.
A combination of improving GDP outlooks around the world, more positive industrial sentiment, low interest rates and high margins for steelmakers will mean strong prices for coking coal for the next several years, Bristow, and other speakers noted. "Global economies are recovering. Purchasing Manager Index (PMI) sentiment is up, industrial production up," Bristow said, dismissing forecasts for a hard landing in China.
“The Chinese economy does not read western economic textbooks,” he said, adding, "Beijing has more economic levers to pull than Donald Trump and all his Washington mandarins can dream of."
Bristow also noted that China steel inventories were not very high, suggesting that demand had been sufficient to absorb the rise in output.
Xcoal's CEO and chief marketing officer, Ernie Thrasher noted: "There is no problem (for steel mills) to make money in the United States, and European Union players are happy about margins." And that was echoed by the Canadian Coal Association's Bob Bell, noting that not long ago, met coal prices were $82-84/t. Bell was no doubt referring to the first quarter of 2016 when the quarterly benchmark was set at $81/t and spot prices were in the mid $70’s/t FOB.
"The coal industry was uncertain and there were discussions about the demise of the US coal industry. Only a few players were expected to survive.”
Both thermal and met coal prices in the international market have rallied strongly since then. In the past 15 months, Australian prime hard coking coal prices have more than doubled to recent highs around $200/t, and spiked above $300/t FOB Australia in late 2016.
Thermal coal prices have also rallied, with cargoes in Northwest Europe trading above $90/t basis 6,000 kc NAR, up from around $50/t 15 months ago. Delegates said China was driving thermal coal, but one Canadian logistics chain player also noted healthy thermal demand from Japan and South Korea, as well as met coal purchases. But it was in met coal, particularly high-quality, low-ash, low sulphur products which could see the healthiest demand.
"(European steelmakers) love our coal, even though we are the wrong side of the country," a Western Canadian junior miner said. Canadian newcomer Conuma, which only formed in 2016, but this year is looking to ship 3.5-4.0 mt of met coal and increase that to more than 6.0 mt next year, is one of the new crop of low debt, low-cost producers or would be producers emerging from the troubled industry of 18 months ago.
Following the purchase of the Walter Energy Canadian mines in September last year Conuma quickly resumed production at the Brule and Wolverine mines with Willow Creek serving as a hub for the other two operations.
But Thrasher also sounded a note of caution. He expressed concerns about volatility in the market and the risks that dealing with that volatility could bring. "The benchmark system has dissolved," he said which has increased volatility. "There was a price correction in May and again in July, and one may be one coming now," he said.
Met coal prices have dipped by at least 8% in the past couple of weeks to $188.05/t FOB Australia, in part linked to jitters about China, which is starting week-long autumn festival holidays, but also on concerns of policy decisions in the run up to the national congress later this month.
And Bristow also laid out a series of risks, increasing in the severity of the threat they posed as time passes, including the risk of a conflict between the United States and North Korea, India’s economy which has "spectacularly disappointed for many years”, rising debt and demand-stifling policies in the West. But for the moment, the industry remains content to follow the New Orleans adage and 'laissez les bon temps rouler' (let the good times roll).
Nick Trevethan is a Markets Editor for Coal at IHS Markit.
Posted 2 October 2017