Metallurgical CoalChina transforms metallurgical coal...

Metallurgical Coal

China transforms metallurgical coal market

Contract price pressure: Annual contract negotiations have kicked off once again with major Japanese and Korean steel mills and the market appearing no closer to a new pricing system despite arguably increased influence from
the spot market.

Metallurgical coal consumers are facing considerable stress in the current market, with the latest reports indicating the spot hard coking coal price has appreciated to as high as US$220/t, up +33% from our last update in October
and an amazing +70% over last year?s contract price of US$129/t!!

Firm fundamentals: Unlike steel, the fundamentals behind metallurgical coal?s rapid appreciation are longer term in nature, giving us considerably more confidence in the commodity, such as:

􀂅 Supply tightness: In our view the small glut that had developed in the global seaborne market has now largely been digested, helped by flooding in Queensland, with Coal producers struggling to match the rapid increase in demand from steel mills who have brought back on idled capacity

􀂅 Growing Chinese presence: The emergence of China as a major coal importer has materially and permanently changed the market and has only added pressure to the faltering supply chain. Demand from China continues to increase on two fronts: a) From an even sharper increase in active steel production versus that of the rest of the world

Increased coal intensity from new larger scale steel mills which require a larger mix of high grade material.

􀂅 Back in deficit: The above factors resulted in China running substantially short on domestic coal supplies, leaving a 104 million tonne deficit in 2009 according to Peabody Energy. With this trend continuing into 2010 we
believe it will push the global metallurgical coal market into a deficit balance.

􀂅 Outlook: Metallurgical coal remains our top commodity pick for 2010; increasing our expectations for JFY?10 to more closely reflect the developments in the spot market which is indicative of the pressure on consumers in the current market.

Consequently we are factoring in a much higher benchmark price of US$225/t, while maintaining our belief that metallurgical coal?s longterm sustainable price level is still closer to US$155/t.


RIV deposits are becoming more valuable by the day.

Cheers, Skip