Underfunded US coking coal tight into 2022: Correction

Corrects Alpha's coking coal output in paragraph 17

US coking coal suppliers expect strong demand in the seaborne and domestic markets, and shrinking availability of financing for coal production, to continue to drive prices in the coming months.

The swift global recovery of steel production from the initial impact of the Covid-19 pandemic in 2020 has outstripped the supply response, and mining firms expect global supply to remain tight for the foreseeable future.

Strong Chinese buying has supported elevated spot prices for US coals, with Argus' daily assessment for low-vol coking coal at its highest since April 2017, at $229/t fob Hampton Roads yesterday. But the continued and growing reluctance of financial institutions to back coal companies will restrict the industry's ability to respond to favourable price environments, mining companies say. The global drive towards decarbonisation weighs on the minds of coking coal producers as well, said a major miner. "It creates hesitation and is more of a concern everyday," he added.

US miners expect strong term demand into 2022

US suppliers expect this year's domestic coking coal contracts to be concluded at significantly higher levels than those concluded in the third quarter of 2020.

The customary ratio between export and domestic sales could come under pressure from strong demand in the US, said a trader. "It will be a good year for those with strong domestic portfolios," he added. And high steel prices in the US are motivating strong buying as now is a bad time to run out of material, said a miner. Low coking coal inventories at coke plants and ports are a bullish indicator for the coming months, he added.

US steel production rose in June by 44.4pc from a year earlier to 7.1mn t and capacity utilisation continues to ramp up, rising to 84.6pc for the week ended 24 July from 84.1pc the previous week.

In the European Union, steel production in the first half of the year recovered by 18.4pc from the previous year to 77.8mn t. Argus' daily northwestern Europe HRC assessment reached €1,206.50/t ($1,434.42/t) on 22 June, the highest since the assessment was launched in November 2018. Some steel buyers are already asking for first-quarter deliveries, said a European mill. "And coal is generally tight," he said, "and I don't expect Australian premium low-vol prices to fall far below $200/t in the near future."

Some European mills are already asking for deliveries from April 2022 onwards, said a major supplier of high-volatile coals. "They are concerned about availability for next year. They don't normally come out seeking offers until much later in Q4."

A major European mill has already issued its annual tender to secure high-volatile coal requirements for 2022, when in previous years the was typically issued in October/November. Mining firms noted that this is likely in part due to concerns over competition with Chinese mills for supplies.

Mining companies have seen little or no effect from the global semiconductor shortage on their sales to steel mills. "Eventually, I'd imagine the shortage to affect steel production, but it hasn't so far from our point of view. Our term customers have already confirmed all their orders for the second half," said a major US producer.

Supply lagging demand

The recovery of global steel demand from the initial impact of the Covid-19 pandemic in 2020 has outpaced the return of capacity that was idled in 2020 in response to the outbreak.

Global steel output rose by 14pc in the first half of the year to just over 1bn t. On the supply side, coal mining firm Arch estimated that of the coking coal capacity taken out of the market globally in 2020, only half will have returned by the end of the year.

A survey of output data submitted to the Mine Safety and Health Administration by most of the major coking coal mines in the US suggested that second-quarter production increased by approximately 10pc since a year earlier but fell by 27pc from 2019.

Those figures do not include the Blue Creek 7 and Blue Creek 4 mines, where production was impacted by the ongoing strike by workers at Warrior Met Coal. Warrior produced 1.05mn st of premium low-vol coking coal at its Blue Creek 7 mine in the second quarter, down by 33pc from a year earlier as the company operates the mine at a reduced rate using non-unionised labour. Premium mid-vol production at Blue Creek 4 fell by 73pc from a year earlier to 147,813st, and the mine is currently idled.

Production at premium low-vol mine Oak Grove fell by 15pc from the previous year to 443,001st in the second quarter, further contributing to the shortage of coals in the segment available to Chinese buyers. And major coking coal producer BHP's expectation that China will restrict imports of Australian coking coal for years to come will give US miners confidence that Chinese spot buying could continue to drive pricing in the foreseeable future.

Several Appalachian low-vol producers were able to raise output in the second quarter. Low-vol production at Coronado's Buchanan mine almost doubled from its lowest quarterly output in over 10 years to 1.1mn st, and Arch's low-vol production at Beckley rose by 6.7pc from a year ealier to 298,223st. Metinvest's production at the Affinity mine rose by 22pc over the same period to 234,148st. But Corsa's low-vol production fell by 18pc year on year to 273,995st.

In the high-vol segment, major producers pushed up output to meet growing demand. Alpha raised its coking coal output by 1.3mn st compared to a year earlier, increasing high-volatile production by 850,000st.Blackhawk's high-volatile production rose by 71pc to 1.53mn st, Ramaco's high-vol output rose by 63pc to 549,919st, while Arch's output at Leer rose by 80c from a year earlier to 1.24mn st. Rosebud's output, comprising predominately high-vols, rose by 59pc to 1.13mn st in the same period.

By Brendan Kjellberg-Motton