Met Coal Pricing
Recent swings in world seaborne metallurgical demand are largely due to China and increasing worldwide steel demand and consumption. Although China historically produces roughly half of the total metallurgical coal produced worldwide, it is also the largest metallurgical coal consumer in the world, domestically consuming nearly all of its own metallurgical coal production. Metallurgical coal has been an extremely volatile commodity over the past 10 years. In 2016, a new Chinese policy that limited domestic coal miners to 276 work days a year resulted in a significant decrease in Chinese production and a resulting increase in seaborne demand, which increased prices from well below $100 per MT in early 2016 to over $300 per MT. A reversal of this policy in late 2016 caused prices to fall to the mid-$150s per MT.
A subsequent cyclone hit the center of metallurgical coal production and supply chain operations in Australia in early 2017, causing prices to again briefly spike to near $300 per MT. From early 2017 through the middle of 2019, the weakening of the U.S. dollar, stronger global economic growth and unexpected strong steel production in China combined to cause seaborne metallurgical coal prices to continue to show strength, trading at average price around $200 per MT. Lastly, in the second half of 2019, metallurgical coal prices fell sharply, largely due to the negative impact of Chinese import restrictions, which seemed to stem from broader global trade tensions. We view the current market as unsustainably low, and are already seeing a supply response, with higher cost mines from some competitors shutting down. Longer term, supply growth is expected to remain muted due to a combination of a lack of available finance and the desire of many producers to return capital to shareholders instead of investing in new mine production.
Met Coal Market Overview
Metallurgical coal is also known as “coking coal,” and is a key component of the blast furnace steelmaking process. North American metallurgical mines are primarily located in the Appalachian area of the eastern United States, and supply all of the requirements of the national steel industry. Imported metallurgical coal has historically been un-economic due to transportation costs. Supply in excess of what can be consumed in the U.S. and Canada is exported to the seaborne market.
According to IEA, the U.S. is the second largest global supplier to the seaborne metallurgical coal market behind Australia. U.S. producers, with their variable production volumes, generally serve as a swing supplier to the international metallurgical coal market. U.S. metallurgical coal exports compete with Australian metallurgical coals that are generally produced at lower cost, but are geographically disadvantaged to supply Western Europe. Conversely, Australian production has a much shorter logistical route to East Asian customers. Any supply shortfall out of Australia — or increase in global demand beyond Australia’s capacity — has historically been serviced by U.S. coal producers.