Lower input cost likely to help steel industry- 03/06/2015

Steel companies will benefit from lower input costs in this quarter as coking coal and iron ore prices have declined significantly with steel demand falling across the globe.

Coking coal spot prices have dropped to $86-$85 from $100 in the previous quarter while contract prices of coking coal have dropped by around 10-15 per cent sequentially.

Margins should improve from the coming quarter, but with unfavourable macro-economic conditions, steel demand continues to remain subdued and steel prices have also declined owing to low demand.

A senior official from Steel Authority of India (SAIL), said, “Input costs have declined in the quarter but steel prices are also on the lower side due to low demand. Going forward the sector is expected to witness revival in demand with government’s focus on infrastructure and housing.”

JSW Steel and SAIL will benefit due to lower coking coal prices as JSW Steel imports 100 per cent of coking coal and buys iron ore from the market with no captive mines. SAIL and Tata Steel have captive iron ore mines but SAIL imports around 80-85 per cent of coking coal while Tata Steel imports around 60-65 per cent of coking coal, said Gautum Chokroborty, an analyst at Emkay Global.

Chokroborty said lower input costs will have some positive impact on the margins of the steel companies, but it is difficult to gauge the quantum as there are many macro-economic factors impacting the sector. Further subdued steel demand across the globe has resulted in cheap imports and globally steel prices have also declined.

Jayant Acharaya, director marketing, JSW Steel also said that coking coal prices in the April-June quarter has declined by around 10 per cent compared to last previous quarter but it is too early to comment if it would result in improvement of margins.

In the January-March quarter steel companies had reported decline in profits due to lower sales and realisation.

However, going forward demand is expected to revive from the fourth quarter once infrastructure activities start picking up post monsoon.

An analyst at Prabhudas Lilladher, declining to be identified, said “Post monsoon infrastructure activities should pick up and demand is expected to be better in the second half of the year compared to the first half of 2015-16.”

Chokroborty of Emkay also said that while steel companies would benefit from lower input costs, demand is expected to pick up from the fourth quarter.
(Source: My Digital Fc via Hellenic shipping news, 03/06/2015 )

Coal headwinds tipped to drive down prices

The forecast price of coal – one of Australia's biggest mineral exports – has been slashed by CitiGroup, which expects it to face stiff headwinds in the coming years. (Source: The Sydney Morning Herald May 28, 2015)

The research comes amid news that Norway and France are slashing investment in global companies that either mine coal or burn it for power in an effort to fight global warming. Norway's parliament has banned the country's $US1.15 trillion ($1.5 trillion) sovereign wealth fund from investing in companies that have over 30 per cent of their business in coal, while France's largest insurer, AXA, will scrap holdings in coal companies.

Metallurgical coal, also known as coking coal, is the highest-quality form and Australia's second-biggest mineral export after iron ore. Thermal coal is third.

But both face a harsh outlook, according to Citi.

In a paper, "Survival of the Fittest", Citi said that coal faced a "triple threat" from the environment, renewables and gas as well as slowing demand from China.

Citi has slashed its long-run forecasts for metallurgical coal from $US170 a tonne to $US125/tonne. It is  trading around $US111.50/tonne.

The long-run forecast for thermal coal has been slashed from $US90/tonne to $US80/tonne. It is trading around $US50/tonne.

Citi conceded that while "current prices are below sustainable long-run levels, we do not expect a return to prices anywhere near the levels seen a few years ago".

Coking coal reached a high of $US338.75/tonne in early 2011.

Australia would remain a major coal player, said Citi. "Australia is the largest coking coal and second largest thermal coal exporter, positions we expect to be retained." However, "we forecast moderating coal supply growth in Australia, although there remains a significant potential for Australia to increase coal production if an improvement in demand growth and higher prices combine to turn around project economics".

Citi stated that the major headwind for metallurgical coal was weak Chinese demand for steel production, which is electricity-intensive. China was "transitioning away from investment-led growth," said Citi, and was increasingly using steel scrap.

"Chinese demand for seaborne metallurgical coal is likely to peak this year and decline thereafter."

To some degree, however, this would be offset by Indian demand for metallurgical coal. "We firmly believe that India will be the largest driver of global metallurgical coal import demand growth over the coming year and beyond," Citi said. Indian needs for steel, driven by infrastructure investment and urbanisation, would fuel its demand for metallurgical coal.

"Indian metallurgical coal imports are forecast to overtake China net imports by the end of the decade and Japan shortly thereafter."

Thermal coal, meanwhile, was in "structural decline as a result of increasing environmental pressures and improving competitiveness of alternate power sources, including renewables and natural gas".

"Costs for renewables are rapidly declining and costs for wind power are forecast to match that of coal within the next few years, with solar also gaining competitiveness."

Although thermal coal demand in China, the US and Europe was expected to drop, India and south-east Asian countries like Indonesia, Thailand, Malaysia and the Philippines would be key drivers for it.

"India is likely to be the largest source of thermal coal demand growth over the coming decade," Citi said.

On the supply side, falling costs had helped coal production. 'We believe costs can continue to move lower in the short-term, but then are likely to rebound somewhat." 

Coking coal price hits 10-year low as demand falls - May 29, 2015

The price of coking coal, the ­nation’s second-biggest export, is crumbling in the face of growing Australian supply and slowing Chinese imports — and the ­dramatic slump could cut more than $600 million of Queensland royalties next financial year and force more mine closures.

As debate rages over West Australian iron ore, on the other side of the country the fall in coking coal prices to a 10-year low is defying industry and analyst predictions that prices should rise, and will have a huge impact on Queensland’s budget if the price does not rebound.

Prices of the steelmaking coal, which traded above $US300 a tonne during the boom and were at $US113 at the start of they year, have slumped to a 10-year low of $US85 a tonne.

The steepest falls were in April on the back of sliding Chinese ­imports as demand slowed and new import standards dealing with fluorine in coal were applied in an uncertain manner.

On the supply side, Australian take or pay haulage and port contracts mean higher-cost mines find it more cost-effective to stay open, while increased productivity drives, most publicly by market leader BHP Billiton, are seeing costs come down and bringing extra coal onto the market.

And there is still more low-cost production at costs of $US50 to $US80 a tonne from Mozambique and Australia to come on to the market.

So while more than half of ­global seaborne export supply is under water and more closures are needed to balance the market, a price rebound does not look ­imminent.

“In the long-term, prices will need to go up but it’s going to require a rebalancing of supply and demand and I don’t think that will happen any time soon,” a senior industry source told The Australian, adding prices had fallen harder than most miners had expected.

“I think we’re in for a sustained period of low prices.”

Analysts agree more mine ­closures are needed to balance the market.

“Given continued growth in low-cost seaborne tonnage and the weak outlook for Chinese demand, we expect further (production) cuts will be necessary,” Citi analysts said in a report this week in which they slashed their long-term price estimate for Queensland hard coking coal by 25 per cent to $US125 a tonne.

In 2014, some higher-cost Australian coking coalmines closed, including Vale’s Integra mine and Sumitomo’s Isaac Plains mine in Queensland and Glencore’s ­Ravensworth mine in NSW, but there are now many mines doing it tough.

Industry sources said Chinese customers were sourcing more Chinese coking coal because the application of fluorine content ­restrictions on exports applied since the beginning of January 1 had left them uncertain as to what cargoes of coal they could bring into the country.

Combined with slower steel demand, this has resulted in a 20 million tonne drop in annualised Chinese imports. It is feared this could get worse after July when new phosphorous content restrictions could come in.

In September, with prices just over $US110 a tonne, BHP’s then coal boss (and now marketing head), Dean Dalla Valle, said he thought prices were bottoming.

In February, with prices still above $US100, BHP chief executive Andrew Mackenzie said the outlook was encouraging.

“In metallurgical coal, we can perhaps be a little more optimistic to the upside,” Mr Mackenzie said, partly because of potential demand from India, pressure on North American suppliers and China’s demand for the best ­quality coking coal. While the long-term still looks healthier, the market is not working as efficiently as many had hoped.

Current spot prices are below BHP’s 2014-15 coal cost guidance of $US90 a tonne but the company surprised the market in February by reporting first-half costs of $US71, helped by a lower Australian dollar, meaning its business is still making money.

Nearly a year ago the Queensland budget baked $US160 coal prices into its 2015-16 forecasts.

Based on Queensland’s 7 per cent coal royalty (which increases when prices are above $100 a tonne) and production of about 150 million tonnes a year, if prices and exchange rates stay at current levels, there would be a $640 million shortfall in Queensland’s budget expectations from that forecast. Queensland Treasurer Curtis Pitt said the recent softness in coal prices reflected softer demand.

“Royalty estimates will be revised in Queensland’s 2015-16 budget (on July 14) and this will take into account the latest estimates of price, volume and the exchange rate,” Mr Pitt said yesterday.

He restated Labor’s election commitment that the government would not make changes to the royalty scheme over this term of office.

Analysts say prices cannot stay this low forever with so much production losing money.

ANZ this month cut its 2015 coking coal forecast from $US114 to $US104, but said there was a risk prices could stay lower.

“Adding to the risk of further underperformance in coking coal prices is the possibility China will renew coking coal exports,” the bank said. 

(source:  THE AUSTRALIAN MAY 29, 2015 12:00AM)

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