Jonathan Rowland

Last year saw the largest contraction in the seaborne metallurgical market since 2011, when flooding took out a significant chunk of Australian supply. Overall, the market shrunk by 5% to 280 million t according to figures from Macquarie Research. Australia accounted for 66% of the market supply – a number that could rise again this year to 68% according to Stephen Duck, Senior Consultant – Steel Raw Materials at CRU. Thereafter, forecasts diverge with Macquarie seeing Australia’s share rising to 70% by 2020, while CRU expects Australia to account for 64% as exports rise from other producers, including Mozambique, Russia and Indonesia.

Whatever the exact figure, however, Australia’s dominance of seaborne metallurgical coal supply will continue as its mines – particularly the BHP Billiton Mitsubishi Alliance mines – occupy most of the lower end of the cost curve. Only some Russian and Teck’s Canadian operations boast comparably low costs. In contrast, all US metallurgical production is cash negative at current prices, according to Macquarie.

This cost advantage has kept Australian exports rising despite falling demand from China, as Australian cargoes displaced US cargoes in markets such as Europe, where Australian coal took its highest share of imports since 2007. Australian exports to India (where they comprised 84% of total imports), Brazil and South Korea also rose. Meanwhile, US metallurgical coal exports were down to 38 million t in 2015 from 59 million t in 2012 and are expected to hit just 19 million t in 2020. Strengthening of the greenback against the Australian dollar, an uptick in mine closures as part of Chapter 11 bankruptcy proceedings or a weaker demand picture could see US exports shrink further.

This decline in US metallurgical coal exports is posing several challenges to steelmakers. The inability to hedge against another extreme weather event taking out Queensland’s coal production is a worry. Macquarie noted that US exports to Asia were flat despite the lower general trend – a fact attributed to “Asian buyers still wanting some supply diversification away from Queensland as a hedge against any weather-related supply disruptions”. There is another more technical worry for steelmakers in the falling supply of US coal, as Duck explained to World Coal: “The fall in production from the US does reduce the availability of certain types of coal,” said Duck. “US coals are sought after by steelmakers for their properties, particularly their fluidity. Asian steelmakers are worried about the future supply of high-fluidity coals not just because US mines are closing but also because BHP Billiton’s Gregory mine is shutting this year. European and Brazilian steelmakers also buy US coal specifically for the fluidity.”

Average fluidity levels of about 800 – 1000 dial divisions per minute (ddpm) are widely seen as required to produce good-quality coke. Many Australian hard coking coals fall below that average, meaning mills have to blend in higher-fluidity coals to reach the required level. The tightening supply of such coals has already had some impact on pricing: last year, Platts reported the prices achieved for higher-fluidity coals were holding up better relative to other metallurgical coals.

“Changing coal supply is also problematic for steelmakers,” concluded Duck. “Coke quality is fundamental to blast furnace performance and targeted quality specifications for coke hinges on the delicate blend of various coal types, which mills are often reluctant to change. Consistency and continuity of coal quality and blending are key to blast furnace performance.”

Beyond Australia and the US, Mozambique metallurgical coal production is likely to ramp up to 2020, despite ongoing infrastructure challenges: “Development of the Nacala logistics corridor has been slow to-date,” commented Duck. “Workers at the mine also went on strike in mid-February and this raises more uncertainty over when exports will take of from here. We’re still expecting exports to rise this year, but there is significant risk around this forecast. By 2020, we forecast Mozambique to be exporting almost 20 million tpy, accounting for 7% of seaborne supply.”

That leaves Canadian and Russian coal competing with the Aussie juggernaut – but without the scale. According to Macquarie, Canadian supply into the global market will total 26 million t this year, down from 27 million t in 2015; Russia’s, just 13 million t, steady with last year. Australia’s contribution will be 183 million t, down from 185 million t in 2015.

“Australian producers’ strategies will continue to be focused on improving mining productivity, which is expected to sustain high output at operations,” concluded Duck. “However, we do not expect to see the same rate of productivity gains at mines that we’ve seen in the last couple of years. Therefore, the potential to squeeze out more tonnes at existing operations is limited. On the other hand, we expect production to ramp up at Anglo American’s Grosvenor mine and Whitehaven’s Maules Creek mine, which both came online last year.”

This article first appeared in the March 2016 issue of World Coal.

About the author: Jonathan Rowland is the Editor of World Coal.