Coking Coal

Usually, Iron ore and coking coal move in lock step. The two raw materials for steel production are driven by the same demand factor, – at least for seaborne trade consumption – by the Chinese, Japanese and Korean steel industries.

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Often production comes from the same or similar multinational suppliers – Rio Tinto Group, BHP Billiton, Glencore PLC.

China’s domestic producers, like its iron ore mines and steel producers are state owned. Both raw materials have experienced massive investment surges this decade as high prices encouraged producers to boost production and both have suffered aggressive price falls as supply has hit a weakening demand market.

The Iron Ore Mini-Rally

Recently, though, prices have diverged. Iron ore as we wrote last week, has gone through something of a mini-rally driven in part by dwindling Chinese port stocks prompting the impression supply is more limited than originally thought and by announcements of mine closures among smaller producers in places such as Iran and Mozambique.

As Iron ore falls reversed and the price rose 30% since the start of April, coking coal could only look on from the sidelines, continuing its fall from over $300 per metric ton four years ago to below $90 now. The latest quarterly metallurgical coal prices have been concluded at the lowest level in more than a decade as quarterly contract prices follow spot prices downward.

Coking Coal: What Are We? Chopped Liver?

Unfortunately for coking or metallurgical coal, even the token supplier rationalization we have seen in iron ore has not been mirrored for coal. Chinese producers, many state owned have actually increased production last year and, according to the Financial Times, China has become a net exporter of coking coal and its derivatives. China’s coking coal imports fell 24.2% in the first four months of 2015 over the same period last year, no doubt aiding the statistics as marginal suppliers were squeezed out the market.

North American Supply Displaced

Australia still supplies some 50% of imports but Mongolia is becoming increasingly important at the expense of Canadian and Russian supplies. To the extent that the US can no longer competitively supply China. Canadian material may also be displaced as prices in North America will be correspondingly depressed further in the second half of the year as suppliers chase the local market.

The most recent statistics from China quoted by Reuters suggest domestic coking coal may finally be plateauing. May’s number was down 4.2% compared to a year ago and that suggests even domestic suppliers are struggling. There is little on the horizon to offer coal suppliers much optimism but steel mills and steel consumers will welcome the reduction in raw material costs for the rest of this year.

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Early this month, Indian authorities launched the second stage of an auction of coal blocks after a successful first stage in February.

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The two rounds of auction, launched under the government’s coal reforms, are expected to bring millions of dollars, helping India nearly wipe out its fiscal deficit, but that’s only part of the story.

India’s steel segment is already hoping the government’s recently-launched “Make In India” campaign increases steel capacity to 300 million tons per year. The adoption of better coal-mining technologies and development of the metallurgical coal supply infrastructure is expected to further enhance the supply chain for steel companies such as Tata Steel and Steel Authority of India Ltd (SAIL).

The auctions, analysts believe, are likely to boost India’s steel sector since the reforms will help improve the availability of coking coal, a crucial raw material in the making of steel, within the nation.

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Metallurgical or coking coal contracts for Q1 2015 hit another quarterly low according to HSBC with hard-coking coal at $117/metric ton, semi-soft coking coal at $86/mt, and ULV PCI (ultra-low, volatile, pulverized coal-injection) at $99/mt CFR China, continuing a downward trend.

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Coking coal prices have suffered from many of the same dynamics as iron ore. Excessive investment in recent years has boosted supply, with more planned to come on-stream. Although some of those under development are expected to be delayed in 2015 due to current prices, others such as Mozambique where the completion of the Nacala corridor is expected this month, are set to add significant extra capacity.

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India took its first step on the road to coal mining reform by initiating the auction of select coal blocks over the weekend. Environmentalists, though, were not too happy about it.

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In September, India’s top court canceled 98% of coal mine permits previously allotted to companies over the last two decades, leaving many analysts shell-shocked and pondering the future of the country’s energy sector.

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Like other global CEOs, Rio Tinto Group‘s Sam Walsh is optimistic about doing business in India due to promises made by Indian Prime Minister Narendra Modi to initiate steps to encourage investment here. A one-window clearance system and easy taxation are some of the reforms that the PM has promised in the recent past, making global businesses like Rio Tinto sit up and take note.

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Rio’s diamond project has been pending for years now, and is likely to provide about 30,000 jobs in the diamond cutting trade, one that India dominates. The mining major has already secured an “in-principle” approval for the issuance of a mining lease for the Bunder diamond project from the local government. If and when the Bunder mine is developed and running, hopefully by 2019, it will place Madhya Pradesh on the list of the top ten diamond producing regions of the world.

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Indian steel producers that use blast furnaces are in for some relief due to the downturn in the price of international coking coal.

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In its recent report, rating agency ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) said that iron ore is expected to be a bigger supply problem for the Indian steel industry, much more so than coking coal.

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Australian Environment Minister Greg Hunt has been a strong advocate of Adani Group’s recently signed $15.5 billion deal to mine and export coal from the Carmichael area to Adani’s native India.

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He tried to counter protests from environmentalists by explaining in great detail how the project would boost Australian economy. He explained that at full export capacity, the project was expected to contribute almost $930 million to the Mackay region’s gross regional product and $2.97 billion to the Queensland economy each year for the next 60 years. The mining project will generate an estimated 2475 construction jobs and a further 3,920 jobs during the operations phase.

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More than one reason to cheer in its ongoing quest for a source of sustainable coking coal. Just as news came that the Australian Government had given the environmental go-ahead to the Adani Group for the $15.5 billion Queensland coal project, came news that a consortium of Indian companies had bagged another major coal sector acquisition.

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The International Coal Ventures Pvt. Ltd (ICVL) has taken possession of coking coal and thermal coal mines in Mozambique. Suddenly, for a country that was facing a coal shortage for years, India is now flush in the black mineral; it’s bonanza time in India.

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MetalMiner reported recently that a consortium of state owned Indian companies International Coal Ventures Pvt. Ltd (ICVL) was actively looking at acquiring Rio Tinto’s Mozambique mining assets, and that’s exactly what happened.

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While ICVL had been scouting for coal assets abroad since its inception in 2009 it had failed to clinch a deal until last week. With the takeover of the Mozambique mines, the steel majors will not run short of coking coal, a crucial raw material in the making of steel. The deal was signed on July 28.

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A high-level team of officials from India’s ICVL has reportedly visited Mozambique in late June. Rio Tinto is looking to exit its Benga mines, which it acquired in 2011 as part of a $3.7 billion purchase of the Sydney-based Riversdale Mining Ltd. The Benga mines, which started commercial production in the third quarter of 2012, have been working to cut operating costs and increase productivity, Rio Tinto said in its latest annual report.

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But if the lackluster track record of the ICVL is anything to go by, Indian steel analysts may as well wait to see the Mozambique deal inked before they break out the bubbly.

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