Customized Research and Market Forecasts

Global coking coal price forecast (November 2015)


Metal Expert Consulting continues publishing open quarterly reports to share its understanding of the coking coal market development in a medium- and long term and compare it with the consensus forecast of investment companies and analysts.

Global prices for coking coal have been falling at increasing rate over the past three months. Spot pieces for hard coals dropped below $80/t FOB Australia in early November, while the Q4 contract prices amounted to $89/t FOB Australia, down from $93/t FOB Australia in Q3.

Such a fast drop of global prices for coking coal came as a surprise to most market insiders. The Metal Expert Consulting’s global coking coal price forecast for Q3 is 20% above the actual figures ($84/t), while the consensus forecast of the investment companies is 11% above the actual price. Meanwhile, spot price for coking coal turned out to be below the most pessimistic forecast made 3 months ago by the investment banks’ analysts.

Comparison of coking coal price forecast accuracy of Metal Expert Consulting and industry analysts over the recent year

Q1 15

Q2 15

Q3 15

Q4 15

Actual price

106

91

84

-

Consensus forecast (investment banks )– October 14

127

128

132

134

Metal Expert Consulting – October 14

115

122

128

128

Consensus forecast (investment banks) – January 15

120

123

127

128

Metal Expert Consulting – January 15

110

108

111

112

Consensus forecast (investment banks) – April 15

-

108

106

107

Metal Expert Consulting – April 15

-

100

101

98

Consensus forecast (investment banks) – August 15

-

-

101

103

Metal Expert Consulting – August 15

-

-

93

97

The factors behind the decrease in coking coal prices are as follows:

– A continuing excess in supply

Similar to other raw materials segments, the global market for coking coal suffers from weak demand. This year, coke production and coking coal consumption in China have been 4-5% below the previous year’s figures. Over the 9 months of 2015, Japan imported 53.4 million t of coking coal, down 2 million t or 4% y-o-y. At the same time, coal supply is still above demand, which boosts stocks and depresses market activity.

– Free trade agreement between China and Australia

In early November the government of Australia approved the free trade agreement with China effective since 1 January 2016, which cancels the 3% import duty on coking coal. This factor started to exert influence on price in September as the Chinese mills adopted the wait and see attitude and either choose a cheaper local material or demand additional discounts from the Australian suppliers.

As of November, the investment banks have different opinions regarding the development of global prices for coking coal. At the same time, all experts are positive that the prices are unlikely to fall further. Macquarie Bank, Deutsche Bank and Commonwealth Bank have the most pessimistic forecast (minimal or close to minimal in the table below), containing a gradual increase in spot quotes to the level of current contracted prices. Citigroup Inc. And Commonwealth Bank are more optimistic (maximum or close to maximum in the table below), expecting a hike in coal prices starting since 2016. To prepare the consensus forecast, we have considered the investment banks’ reports issued not earlier than October.

Global hard coking coal price forecasts by industry and financial companies, $/t

Q4 15

Q1 16

Q2 16

Q3 16

Q4 16

2015

2016

2017

2018

2020

Consensus forecast

88

89

90

92

92

91

100

111

92

131

Maximum forecast

90

97

100

100

93

99

110

128

93

170

Minimum forecast

82

85

85

88

91

87

93

100

91

100

Note: To get the forecasts, all available prices have been adjusted to a common benchmark basis – the FOB Australia price for hard coking coal.

Metal Expert Consulting’s methodology of forecasting global coking coal prices is based on mixed forecasting methods and includes models of non-linear dynamics, demand and supply balance in the global coal market, and estimates of key suppliers’ costs.

Metal Expert Consulting’s quarterly forecast until the end of 2015 is based on the Company’s internal methodologies with the use of non-linear dynamics methods. We believe that coking coal prices have no more room for decrease, with the bottom to be at $77/t. Our forecast is below the minimal forecast of investment banks.

Our medium- and long-term coking coal price forecasts have been updated in line with the recent market developments and macroeconomic trends. While making the long-term forecast, we have assumed that coking coal production costs of current suppliers will add 2-4% per year on rising inflation, wages and equipment cost, growing energy and fuel tariffs, a possible increase in production royalty and taxes, etc. Meanwhile, the growth of average production cost level will be restrained in the range of $125-130/t by the appearance of new producers (having lower-than-market average production costs), tightening of competition and reduction of profitability of traditional suppliers. The above figures have been calculated as the expected production costs plus the minimally acceptable operational profitability (estimated at 20% for least efficient suppliers being in the right side of cost curve, or at 50% of the average production costs in the market).

The graph below shows comparison of Metal Expert Consulting’s updated export price forecast for Australian hard coking coal with the prices that investment and industry analysts expect (adjusted to the same basis). Obviously, Metal Expert Consulting’s forecast is similar to that of the investment banks.

Source: Metal Expert Consulting

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