Analysts say met coal prices to rise, iron ore to drift lower

According to the firm, growth in the all important Chinese steel sector, driver of the fortunes of the world’s iron ore and met coal producers, is still substantial, but slowing.

Paul Gray, Wood Mackenzie’s principal iron ore analyst, said Chinese steel consumption growth has slowed from rates of 14.5% to between 4% and 6%.

“We’re moving to a less steel intensive phase of growth from China,” he said.

Consequently, the steel industry is struggling with 40m tonnes of plant capacity idled, including 26m tonnes in Europe and 2.6mt in Australia.

In China, private steel producers struggle on, with marginal profitability, while state owned firms have little incentive to curtail output.

As a result, excess steelmaking capacity will remain a key constraint on industry profitability, with industry utilisation languishing at around 80% and steel prices only likely to rise when that figure goes over 90%.

Notwithstanding the steel industry’s current struggles, which have depressed iron ore and met coal prices, Wood Mackenzie has a more upbeat take on met coal’s longer term prospects.

The firm anticipates brisk growth in world GDP through the long term, with a global average of 3% growth to 2030.

China and India’s economies will stay robust, driving increases in crude steel and hot metal production. This will push met coal imports from 240mt now to 498mt in 2030.

Due to its plentiful reserves and low cost production, Australia will capture most of the 258mt increase in seaborne met coal demand between now and 2030.

“Australia potentially can capture 150mt of new exports by 2030,” said Gray.

With Queensland floods recently crunching met coal supply, and pushing prices to a peak of $330/t in the second quarter of 2011, Gray said “the increased reliance on Australian production makes weather events more of a concern moving forward”.

Moving to the present, Gray said that he foresees a gradual rise in met coal prices which bottomed out at $200/t. He added that beyond 2020, prices should increase at a stronger rate due to the need to develop more high-cost projects to meet increased demand.

In terms of iron ore prices, Wood Mackenzie believes that while iron ore prices may have peaked, at $168/t in 2011, they will remain at historically high levels, trending to $120/t by 2016.

Beyond then, supply is expected to outstrip demand, so investors and project developers need to capitalise on the tight market situation from now till 2015.

Gray suggested that iron ore at 120/t by 2016 will knock out high cost suppliers that account for 20% (of world supply). However, he noted that China’s plans to increase captive imports, from under 5% of total iron ore consumption now to 12% by 2020, would support some of these higher cost producers.
Contact:  www.woodmac.com

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