The Metallurgical Coal Outlook

Alistair Ramsay – Head of Research

Why have metallurgical coal prices fallen

even as iron ore has soared?

Fastmarkets |

Coking coal’s decline was so severe this year, that benchmarks briefly fell below iron ore

• After nine full months, the

daily average PHCC

benchmark fell 29.7% year on

year to $137/t.

• By contrast, the daily average

62% Fe fines benchmark,

also imported in China, rose

5.6% to $100/t.

3Source: Fastmarkets

0

50

100

150

200

250

300

350

Ja

n-1

5

Apr-

15

Jul-15

Oct-

15

Jan-1

6

Apr-

16

Jul-16

Oct-

16

Jan-1

7

Apr-

17

Jul-17

Oct-

17

Jan-1

8

Apr-

18

Jul-18

Oct-

18

Jan-1

9

Apr-

19

Jul-19

Oct-

19

Jan-2

0

Ap

r-2

0

Ju

l-2

0

Oct-

20

Iron ore 62% Fe fines, cfr Qingdao, $/tonne

Premium hard coking coal, cfr Jingtang, $/tonne

Source: NBS

Not surprisingly, Chinese ore miners have had another great year; coal miners one to forget!

.

4

• Rising prices have helped

Chinese iron ore miners

increase their profits by

31.3% this year.

• By contrast, coal mining &

washing profits are down

30.0%.

• Unsurprisingly,

steelmakers are also

struggling; profits fell

23.1% bringing margins

down to just 3.1% from an

already poor 4.0% in

2019.

-100%-80%-60%-40%-20% 0% 20% 40%

Mining of Ferrous Metal OresManufacture of Computer,…

Manufacture of Special-Purpose…Manufacture of General-Purpose…

Production and Distribution of WaterManufacture of Motor Vehicles

Production and Supply of Electric…Production and Distribution of Gas

Manufacture of Electrical…Mining of Non-Ferrous Metal Ores

Waste Recycling and RecoveryManufacture of Railway…

TotalManufacture and Processing of…

Manufacture of Fabricated Metal…Manufacture and Processing of…

Mining and Washing of CoalRepair of Fabricated Metal…Extraction of Petroleum and…

Petroleum, coal and other Fuel…

Year-on-year changes in profits in Jan-Aug

Ch

ine

se

In

du

str

y

Source: Fastmarkets Steel Tracker. Note: Hot metal proxies are lagged two months for EU and Chinese spreads; prime scrap lagged one month to calculate US spread

Arguably, Chinese steelmakers have been better off than their foreign peers…

$146/t-$8/t year-on-year

0

100

200

300

400

500

600

700

Ja

n-1

4

May-1

4

Se

p-1

4

Ja

n-1

5

Ma

y-1

5

Se

p-1

5

Ja

n-1

6

Ma

y-1

6

Sep-1

6

Ja

n-1

7

Ma

y-1

7

Se

p-1

7

Ja

n-1

8

Ma

y-1

8

Se

p-1

8

Ja

n-1

9

Ma

y-1

9

Se

p-1

9

Ja

n-2

0

Ma

y-2

0

Se

p-2

0

Us$

pe

r to

nn

e s

pre

ad

be

twe

en

HR

C

and

lagg

ed h

ot m

eta

l/pri

me s

cra

pChinese spread EU spread US spread

US average China average EU average

-$58/t year-on-year

+$24/t year-on-year

$169/t

$286/t

Source: WSA, NBS, Fastmarkets

… thanks to an enduring steel demand surge which has contrasted with a collapse in the rest of the world

.

6

• Steel demand appeared to rise

by as much as 9.0% year on

year through the first nine

months in China, accelerating

from the 8.1% growth we

recorded at the same time one

year ago.

• The rest of the world, by

contrast, has seen demand fall

by 15.9%, compared to just a

0.3% decline one year ago. -20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Ja

n-1

8

Ma

r-1

8

Ma

y-1

8

Ju

l-18

Se

p-1

8

No

v-1

8

Ja

n-1

9

Ma

r-1

9

Ma

y-1

9

Ju

l-19

Se

p-1

9

Nov-1

9

Ja

n-2

0

Ma

r-2

0

Ma

y-2

0

Ju

l-20

Se

p-2

0

Ye

ar-

on

-ye

ar

ch

an

ge

s in

ap

pa

ren

t fin

ish

ed

ste

el d

em

an

d

RotW China

Fastmarkets |

Given the strong demand in China, uncertain but increasingly important iron ore import volumes have exacerbated the price trend

• Last year and to a lesser

extent in 2020, supply-side

concerns in the seaborne

market have caused prices to

spike.

• We see this as an inverse

relationship between Chinese

imports as a share of Chinese

demand, and the price.

• A few years earlier, the

opposite happened as a

surplus of seaborne imports

lead to a price collapse.

7Source: Fastmarkets

0

20

40

60

80

100

120

140

0%

20%

40%

60%

80%

100%

120%Ja

n-1

5

Ma

y-1

5

Se

p-1

5

Ja

n-1

6

Ma

y-1

6

Se

p-1

6

Ja

n-1

7

Ma

y-1

7

Se

p-1

7

Ja

n-1

8

Ma

y-1

8

Se

p-1

8

Ja

n-1

9

Ma

y-1

9

Se

p-1

9

Ja

n-2

0

Ma

y-2

0

Se

p-2

0

62

% F

e fin

es, cfr

Qin

gd

ao

, $

/to

nn

e

Ch

ine

se

im

po

rt p

en

etr

atio

n

Import penetration Iron ore 62% Fe fines, cfr Qingdao, $/tonne

Source: Steelhome, Fastmarkets

While China’s dependency on imported iron ore is increasing, for coking coal it is relatively limited

.

8

• As Chinese demand keeps

growing, the country’s

exposure to the seaborne

market remains high,

supporting prices which are

less exposed to weaker

markets elsewhere.

• For coking coal by contrast,

seaborne exposure to a

strong Chinese market is

limited and so suppliers are

more dependent on weaker

markets elsewhere.

0%

20%

40%

60%

80%

100%

120%

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Ju

l-17

Se

p-1

7

No

v-1

7

Ja

n-1

8

Ma

r-1

8

Ma

y-1

8

Jul-18

Se

p-1

8

No

v-1

8

Ja

n-1

9

Ma

r-1

9

Ma

y-1

9

Ju

l-19

Se

p-1

9

No

v-1

9

Jan-2

0

Ma

r-2

0

Ma

y-2

0

Ju

l-20

Coking Coal Iron Ore

Source: JISF, VWStahl, AcoBrasil, NBS

…consequently coking coal prices are more dependent on weaker, more volatile markets

-19.4%Japan (to August)

Brazil (to September)

Germany (to September

-18.3%

-10.1%-40%

-30%

-20%

-10%

0%

10%

20%

30%

Ye

ar-

on-y

ea

r ch

ang

es in

BF

I p

rod

uctio

n

Germany Japan Brazil China

Source: NBS

And even in strong China, where demand is rising, steelmakers have been attempting to reduce their coke & coking coal intensity

• Official statistics from the NBS in

China reveal that coke rates and

underlying coke consumption fell

over recent years, even as iron

and steel production increased.

• The spectacular rise in iron

production since 2017, however,

suggests that coke consumption

must have increased at

steelmakers even if the coke rate

fell further.

• This year, however, just as net

imports of iron ore rose more

than 10%, net imports of coking

coal fell more than 10%,

suggesting why prices have

moved in different directions this

year.

400

420

440

460

480

500

520

540

560

580

600

0

5

10

15

20

25

30

35

40

45

50

Kg

co

ke

Co

ke

co

nsu

mp

tio

n, M

t

Total Coke Consumption at steelmakers Coke kg/t BFI

Is the semblance of recovery already

over?

Source: Steelhome citing China Customs. Data refer to Chinese coking coal imports in first 8 months of 2020

Australia dominated the Chinese import market

• The big story in coal

recently has been in

China, where the

government asked

steel mills to avoid

importing Australian

coal.

• Alternative suppliers

are believed to be

short on material and

shipping times so

long, that buyers’ only

option for fresh

deliveries this year is

to make local

enquiries.

• This is as the

government reportedly

planned: to support

the domestic mining

industry.

Australia63%

Mongolia21%

Russia8%

Canada6%

USA1% Other

1%

Source: Fastmarkets. Data compiled on a weekly average basis.

Unsurprisingly, Chinese domestic prices are rising BUT at seaborne suppliers’ expense…

100

120

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0

50

100

150

200

Oct

19

No

v 1

9

De

c 1

9

Ja

n 2

0

Fe

b 2

0

Mar

20

Ap

r 2

0

Ma

y 2

0

Ju

n 2

0

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l 2

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l 2

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Au

g 2

0

Se

p 2

0

Oct

20

$/t

co

kin

g c

oa

l

Ch

ina-o

rigin

Pre

miu

m o

ve

r P

HC

C, cfr

Premium over PHCC, cfr HCC, del Tangshan

PHCC, cfr JingtangThe immediate impact of the “verbal” agreement not to import Australian coal has been…

…Rises in local coal prices of roughly $5/t…

…Reductions in seaborne coal prices of close to $20/t

Source: Steel Raw Materials Tracker

…adding downside risks to our short-term price outlook for PHCC…

.

14

• China’s decision to “raise the

drawbridge” on Australian coal

has negatively impacted spot

prices and puts predicted price

rises under threat.

• In our so-called “verbal impact”

scenario where neither offers nor

bids can be meaningful, prices

are likely to be paralysed until

trade is allowed to resume (next

year).

• Given no change to our

fundamental view, however, we

expect prices in Q1 will catch up

with our forecasts.

0

50

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250

Jan-1

9

Ma

r-1

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Ma

y-1

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l-1

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p-1

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v-1

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n-2

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y-2

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l-2

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p-2

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No

v-2

0

Ja

n-2

1

Ma

r-2

1PH

CC

, cfr

Jin

gta

ng,

US

$/t

October forecast "verbal impact"

Source: WSA, Fastmarkets. Note: e estimate; f forecast

… though an inevitable demand rally should pull prices higher again in the first quarter

+1.2%Year-on-year changes in non-China markets in Q1

Quarter-on-quarter changes in non-China markets in Q1

Quarter-on-quarter changes in Q1 in China; year-on-year changes are higher at 5.5% given effects of COVID in early 2020

+2.1%

+7.6%0

50

100

150

200

250

300Q

1 1

7

Q2

17

Q3

17

Q4

17

Q1

18

Q2

18

Q3 1

8

Q4

18

Q1

19

Q2

19

Q3

19

Q4

19

Q1

20

Q2

20

Q3

20

e

Q4

20

f

Q1

21

f

Americas EU India Japan South Korea China

Can the longer-term outlook live up to

post-crisis targets?

Source: WSA

Can we expect a demand surge next year, as in 2010?

.

17

• At the last recession in 2009,

non-China demand fell by

22%, the partial recovery the

following year amounted to

20%. Including China the

recovery amounted to 11%,

following a 2% fall in 2009.

• The EU and the Americas

rose as much as 30% in

2010, following particularly

sharp recessions. Only India

rose more quickly but from a

smaller base.

0

200000

400000

600000

800000

1000000

European Union (28) Japan

India C.I.S.

Total Americas South Korea

RotW China

Source: Oxford Economics, Fastmarkets. Note: SWIP is a steel weighted industrial production index

The 2021 recovery is predicted to be as dramatic as what was experienced in 2010…

According to Oxford Economics

data, the key steel using sectors

from construction through

automotive industries fell by 7.8% in

2009 before reviving 8.2% the

following year.

The automotive recovery was

particularly sharp, from -12.6%,

automotive output surged 26.0% in

2010!

This time around, a similar 7.2% fall

is predicted in end-user activity this

year before an 8.3% revival is

forecast next year.

Again leading the recovery will be

the automotive industry, dominated

by ironmaking and coke consuming

integrated steel mills.

After falling 21.2% this year, far

worse than in 2009, the recovery is

expected to reach 19.1% next year.

-30%

-20%

-10%

0%

10%

20%

30%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020f2021f

SWIP - September 2020 Automotive - September 2020

Source: WSA

And with a demand surge, what could happen to prices?

.

19

• At the last recession in 2009,

coking coal prices fell by 34%

to $165/tonne fob Australia.

The following year, in light of

an 11% revival in demand,

prices rose 29% to reach

$213/tonne. They rose a

further 40% in 2011!

• As in 2009, the PHCC

benchmark has fallen hard so

far this year (30% in first 9

months).

• Assuming it were to recover

next year at the speed it did in

2010, we can expect a

nominal gain of $34/t.

-50%

0%

50%

100%

150%

200%

0

50

100

150

200

250

300

350

2008 2009 2010 2011

Quarterly Contract Benchmark Year-on-year changes