I haven’t caught up coking coal for a while but it’s worth reminding ourselves of what a commodity market can do once the balance of supply shifts. Private and official forecasters have repeatedly failed to catch this falling knife since its peak at $320 per tonne in early 2011 as floods blocked up Queensland supply. Since then, it’s been all one way, down:
The current price is at $122, down 62%. The December quarter contract price was settled at $152 per tonne and the January quarter is going to fall sharply. This has several implications:
- BREE’s current forecast for 2014 is a contract price of $150. It’s going to miss big, leading to more pressure on the terms of trade assumptions underpinning the budget;
- it does lift some of the pressure on Chinese steel mill margins. Despite the pressures of high iron ore prices and weak steel prices, coking coal has prevented the margin collapse from getting completely out of hand. From Credit Suisse:
- finally, coking coal is a sobering lesson for what’s going to happen to iron ore as supply overtakes demand but there are significant mitigating factors. The first is the “take or pay contracts” that dominate coking coal rail supply. These force miners to pay for rail capacity whether they use it or not in both the US and Australia. These do not exist in iron ore where railways are proprietorial. Iron ore is also more geographically and company concentrated with three Pilbara firms operating as a near cartel. Both of these factors hand more pricing power to the supplier in iron ore than in coking coal. Still, the bigger lesson is how sticky production has proven to be despite big losses in producers worldwide.
I expect coking coal to keep falling yet. More Australian supply is still coming on stream and international competitors aren’t disappearing fast enough. My forecast is for a long term bottom at $110 with no swift rebound.
