rocks & ores: metallurgical coal price recover

Rocks & Ores: Metallurgical coal price recovery delayed due to resilient supply
Rebalancing to marginal cost pricing

We expect a gradual recovery of metallurgical coal prices over 2013E-17E. As the marginal buyer in the spot market, Chinese consumers have taken advantage of depressed seaborne prices by increasing its import volumes so far this year (Q1 imports up 70% yoy) but this has not been sufficient to tighten the market since seaborne supply has been surprisingly resilient. The rebalancing of the seaborne metallurgical coal market will be more gradual than we previously anticipated, and as a result we downgrade our 2013E forecast by 8% to US$164/t. Further out, we expect prices to return to our estimate of marginal production costs of US$180/t in 2014E and we also reduce our 2014E/15E/16E/17E forecasts to US$180/185/190/195/t (down 8%/10%/10%/7% respectively).

Supply growth continues in spite of low prices

Global steel production growth is accelerating relative to 2012, and we expect seaborne demand for coking coal to increase by 8Mt yoy. However, the supply response to low prices has been counterintuitive, as many loss-making mines are avoiding production cuts and are chasing productivity gains instead as a way to reduce unit costs. In our analysis of supply growth we differentiate between the (a) Queensland flood recovery, (b) the focus on productivity, and (c) the delivery of late-stage growth projects. In our view, Australian producers will deliver over 22Mtpa of incremental capacity by 2017E into a market that is already well supplied and where demand is set to grow at a modest 2.0% average annual rate over our forecast period.

Industry fundamentals remain attractive… in the long term

Looking beyond the short/medium term, the industry fundamentals for metallurgical coal remain attractive. Unlike other commodities, metallurgical coal is a geologically scarce resource, and the threat of substitution from Direct Reduced Iron (DRI) or scrap metal is limited, in our view. Once excess production capacity is finally absorbed, seaborne met coal prices should shift towards inducement pricing levels. We leave our long term price forecast unchanged at US$205/t (in 2018E US$).