Finding something positive to write at the start of the year has not been easy. The challenges that dominated 2013 will not go away quickly (if at all) in 2014. However, there is some reason for hope that – in the metallurgical coal market at least – recovery may not be as far off as it may seem.
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While thermal coal is facing a crisis of competition from other energy sources (most notably natural gas in the US), the same is not true in the steel industry, where metallurgical coal remains a vital ingredient. And as emerging market urbanisation continues apace, the demand for metallurgical coal is well set for the future.
Take China. As the Economist Intelligence Unit noted in a report last year: “China has enough construction capacity to build a city the size of Rome every two weeks. It can build Spain in a year and it can build Europe in 15 years.” But while the country is forecast to provide an increasing amount of its own thermal coal – squeezing imports – the same is not expected for its domestic metallurgical coal supply. Speaking at last year’s Met Coke World Summit in Pittsburgh, Jim Truman, principal analyst for metallurgical coal at Wood Mackenzie, predicted Chinese production would remain flat as mines in Shanxi, China’s key metallurgical coal producing region, face “a lot of obstacles”. As a result, Chinese imports of metallurgical coal are expected to grow by 12% /year to reach 80 million t in 2018.
Domestic supplies will also not be enough for Asia’s other giant: India. Indian coal is a high ash product making it unsuitable for steelmaking and meaning there is little prospect for domestic supply growth. Currently steelmakers in the country source 60 – 65% of their coal from imports. This will continue as Indian steel production grows: EY expects consumption of metallurgical coal in India to increase by 30% between 2013 and 2017 to 59 million t, of which 70% will be imports.
The result is a relatively bright outlook for metallurgical coal. As Mike Elliott, global mining and metals leader at EY, recently told World Coal: “New metallurgical coal supply is unlikely to be sufficient and timely enough to meet future demand from the steel market. And that demand – even at a tepid rate – will be substantial enough to support a healthy metallurgical coal market.”
And what of thermal coal? In this month’s Industry View, Lars Schernikau, author of Economics of the International Coal Trade - the Renaissance of Steam Coal and regular contributor to this magazine, argues that here too there may be reason to believe we have reached the bottom of the market (see p. 14). While the road back may be long and challenging and further setbacks (particularly regulatory) may yet come, perhaps there is finally an end in sight to the doom and gloom that has hung about the industry.