Metallurgical Coal Markets: A Volatile Price Ride

SUPPLY RETURNS TO NORMAL

By late November both the Appin and Grasstree mines returned to production. Also easing the market tightness, in mid‐November China relaxed its work rule policy to allow mines with good safety records to produce 330 days per year through mid‐March 2017. With the large Australian mines back and China’s domestic mines at more normal levels, the price began to fall. By mid‐February, the low‐volatile price was cut in half to about US$150/t.

WHAT DOES THE REMAINDER OF 2017 HOLD FOR PRODUCERS

With prices still substantially above the averages for the past few years, coal producers are examining ways to increase output. BHP is looking to increase output by 2.0 Mt in H1 (implying 4.0 Mt for the year) and Anglo American plans about 2.5 Mt additional output from its Grosvenor mine. In Mozambique, Vale is pushing to export about 4.0 Mt more coal in 2017 than it did in 2016. These changes alone could add over 10.5 Mt to the global seaborne supply.

In addition to those changes, which would more than cover our expectation for demand growth, North American producers are nearly all engaged in expansions by working more shifts each day, working more days per week and in some cases opening new mines. Canada will see both the Brule and Wolverine mines return, as well as Donkin in Nova Scotia. In the US, all longwalls in Alabama are increasing output. Ramaco has re‐opened the Elk Creek complex and plans to open Berwind this year. Nearly all other producers have plans for some level of expansion to capture some business. We estimate over 15 Mtpa of announced potential expanded output for 2017.

Wood Mackenzie believes that the market will be awash with available coal over the course of 2017, pushing prices down. As a result, not all of the announced production expansions are likely to come to fruition, only those positioned with the best cost structures and the ability to capture some of the modestly expanding demand.

Volatility will remain. The Chinese government’s decision on whether to restrict domestic production is a new feature of the marketplace and will continue to add volatility to prices and volume requirements for imports. We expect their 276 day work rule will be reinstated for Q2 2017, but many mines will be exempt, having annual contracts with steel mills. Still, the seaborne market should be better poised to handle spikes in demand, with more supply at hand, than it was in 2016.