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
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
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.
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