Coking Coal

Our Raw Steel MMI rose 2 points or by 4%. Wait, what? Didn’t steel prices fall in September?

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Yes, they did. Significantly, domestically, but the index collects and weights 13 global steel and raw material price points. So, while prices in the U.S. fell, international prices held well and coking coal prices saw a spectacular increase.


The price of Chinese coking coal, a vital ingredient in the steelmaking process, more than doubled in September. Behind the surge are disruptions in Australia, a leading supplier to the export market, and production curbs in China caused by government restrictions.

Meanwhile, steel prices in China were flat following the price divergence we already witnessed last month, see falling US prices and rising/flat international prices. The rally in U.S. steel prices, which was driven mainly by trade cases, is now fading.

Global steel production continues to increase. In August, production in China rose 3% year-on-year. The country still has a lot work to do if it wants to meet its target of reducing capacity. Meanwhile, U.S. steel production fell in August.

Taxing Chinese Supply Creates Opportunity Elsewhere

Despite a recovery in prices during the first half, U.S. producers haven’t increased output to create an artificial domestic shortage. However, there is no global shortage and falling domestic output is only pushing steel buyers to source their needs from overseas.

The clearest example is cold-rolled coil (CRC). Prior to the recent trade cases, China accounted for more than half of U.S. CRC imports. Imports from China were effectively shut down thanks to a super-high dumping/countervailing duty margin of 265%. However, it seems that imports now are coming from other sources. In August, cold-rolled coil imports rose almost 11% from last year, recording the highest levels in 13 months.

Tariffs Can’t Stop International Prices From Falling

In a bid to protect their turf from the new wave of steel imports, U.S. steel companies are filing a case against transshipments of Chinese steel products from Vietnam.

U.S. steelmakers will likely find it difficult to prove those allegations and, even if they do, those same imports could come from other countries. Trade cases can provide short-term breathers in the current import environment, but — in the medium- to long-term — U.S. steel companies will have to become more competitive to win the market back from imports. Although U.S. prices have fallen recently, the spread between U.S. and international prices is still lucrative for domestic buyers to look for overseas for their material.

The key now is not only to watch domestic prices, but also international prices. Eventually, the current decline in domestic prices will find support if the gap between domestic and international prices narrows enough. On the other hand, if international prices start to slide, too, it might be difficult for U.S. steel prices to find a floor.

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BHP Billiton is planning to boost coal production in the next three years while no agreement has been reached about reducing Chinese aluminum overcapacity.

BHP Billiton Bullish on Coal

Top global miner BHP Billiton outlined plans to boost coal output by 8% over the next three years while slashing costs, and said it would only consider premium, lowest-cost assets for any acquisitions.

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BHP Billiton is the world’s top exporter of coking coal used in steelmaking and also a producer of energy coal. The Australian miner is in the enviable position of running profitable coal mines at a time when more than half the world’s coal mines are losing money.

Andy Home: No Agreement on Chinese Aluminum

“China has committed to ensure that its central government policies and support do not target the net expansion of steel capacity; and to actively and appropriately wind down ‘zombie enterprises’ through a range of efforts, including restructuring and bankruptcy.”

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This statement was made by U.S. Treasury Secretary Jack Lew earlier this month after high-level talks with Chinese officials in Beijing. Reuters’ Andy Home, however, writes that while there has, at least, been a meeting of the minds in regards to Chinese steel capacity, the two sides failed to reach any sort of agreement regarding aluminum other than to hold more talks, according to Lew.

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. Read more

Early  this month, Indian authorities launched the second stage of coal block auctions 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.

New Coal Auctions

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.

The devaluation of the Russian Ruble has made Russian exporters more aggressive and the strong dollar generally has helped compensate miners for the lower prices. Even so HSBC estimates that at $117/mt benchmark coal some 35% (around 108 million tons) of global and 65% of US seaborne supply is losing money and that some 51 mt (30%) of Australian capacity is under strain. Indeed Australian miners have already been asked to take a 38% pay cut at the Griffen mine and adhere to a 35-hour work week slashing weekend supplements and overtime. Further closures and curtailments, particularly in the US, are likely this year.

Source: The Steel Index

Source: The Steel Index

Demand is not likely to come to the rescue. Crude steel production growth is possibly going to be no more than 1.1% this year with short term restocking providing only a temporary relief to miners in terms of volume.

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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.

The new government promised it would usher in reforms in the sector quickly. A new bill — the Mines and Minerals (Development and Regulation) Amendment Ordinance — sought to make amends to the process of coal mine allocations. The previous process was stained by corruption allegations. Previous governments had merely allocated coal mines but under the new system, companies were given an opportunity to bid for mining rights in the interests of transparency.

The government has put 19 blocks up for auction in the first round that started on Feb. 14. This phase will end on Feb. 22, and all sale formalities will be completed by March 31. The mines being auctioned are in the provinces of Odisha, Jharkhand, Chhattisgarh and Goa.

The first few days have seen aggressive bidding for coal blocks by some of India’s biggest companies, such as Reliance, Adani Power and Hindalco. Some of the other companies who technically qualified to bid were Jindal Steel and Power Ltd. (JSPL), Bharat Aluminium Co Ltd. (Balco), Essar Power M P Ltd., GMR Chhattisgarh Energy Ltd., GVK Power, JSW Energy, Ambuja Cement and Hindustan Zinc.

The auction process is likely to fetch the Indian Government an estimated $3.4 billion (Rs 21,000 crore). If that happens, the government of India will use the money to clear its fiscal deficit.

India’s estimated coal reserves are at about 301 billion metric tons, but Indian companies have had to import coal because of a mining stoppage caused by the corruption allegations followed by the court order.

While the government is expectedly pleased with the manner in which the auction is progressing, saying the poorer provinces would ultimately reap the harvest of coal block auctions, some environmentalists had a different take. According to them, the present government missed the bus in really undertaking “true reforms” on the natural resource allocation. There was no point in allotting the mines first without evaluating their impact on the surrounding environment, was their take.

There are about 60,000 applications for mining concessions pending with central and state governments. The government said it would implement a different method for auctioning coal blocks meant for power producers, as compared to the present round which was largely meant for coal to be used by steel and cement producers.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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.

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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Coking coal prices dipped about 16 percent in the first quarter of 2014-15 as compared to the previous quarter. Nearly the same contract prices have been rolled over in the second quarter. The Business Standard quoted ICRA Senior Vice-president Jayanta Roy saying with the rupee-dollar rate remaining stable this fiscal year, the decline in price had come as a relief to blast furnace operators of India.

In 2014, there was a 13 percent decline in coking coal prices. Already, many of the Indian steel players have posted better than expected financial results in the first quarter of 2014-15, because of the lower price of 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.

For India, on the other hand, it would mean securing the energy needs for millions.

Cabinet colleague and Australia’s Trade and Investment Minister Andrew Robb, too, hailed Hunt’s decision to grant environmental approval to Adani Mining, the subsidiary of Adani Group, the company that bagged the contract. He said the project demonstrated the enormous potential that remained in Australian resources and energy, in this case coal, to help drive continued economic growth and job creation. The move will help support the opening of Australia’s first new mineral province in 40 years..

Posco Engineering & Construction Co., a unit of South Korean steel giant Posco, will help build the railway tracks for transporting coal from the mine being developed by Adani. Together with the rail project, overall, the Queensland project is expected to generate over 10,000 jobs in Australia.

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

India has 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!

What’s being dubbed as the icing on the cake is that the Consortium has acquired the prized coal mines for approximately $50 million, where once they had cost Rio close to $3 billion in 2011. The dirt and minerals were literally purchased dirt cheap. Almost like the valuable coal was thrown in for free.

The ICVL is a joint venture of state-run companies with five state-run entities partnering, including the Steel Authority of India (SAIL), the National Thermal Power Corporation and the Rashtriya Ispat Nigam Ltd. The latter depends entirely on coking coal imports to meet its demand, while SAIL currently imports 75 percent of its needs from abroad. Apparently, not much longer, though.

MetalMiner recently reported that the ICVL was actively looking at acquiring Rio Tinto’s Mozambique mining assets, and that’s exactly what happened.

Incidentally, while ICVL had been scouting for coal assets abroad since its inception in 2009, it had failed to clinch every deal it attempted until hitting the Rio Tinto jackpot. 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, for the foreseeable future.

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.