Coking coal price seen plummeting on steel slump
The recent slump in steel demand and cuts in production are likely to halve the price of steel-making coking coal next year, an investment bank research note said on Tuesday.
Citigroup Global Markets also said if the global financial crisis continued to curtail steel demand, annual contract price negotiations would be delayed and there could be more lasting shutdowns at steel plants.
“Steel production cuts will push coking coal into deep and persisting surplus,” said Alan Heap and Alex Tonks, who are global commodities strategists for Citigroup. “We expect coking coal prices to fall 50 percent to $150 per tonne next year.”
According to Jim Thompson, editor of the industry newsletter, Coal & Energy Price Report, the price of coking, or metallurgical coal, virtually tripled to well over $300 per tonnes this year as steel production surged on demand from China and other developing countries.
“Prices had gone to the moon, to record levels, before the financial meltdown,” he said, noting that 2008 contract prices, set in 2007, were in the range of $130-$140 per tonne, while next year’s were already fixed at well over $300.
“Many U.S. steelmakers had just settled on ‘09 prices, which were phenomenally high. I doubt those settlements will sit now and suspect they will renegotiate.”
Thompson said he expects 2009 contract prices to settle at around $200 — a price unlikely to result in mine closures.
“But the steelmakers are playing a complicated game because in the longer term, met (metallurgical) coal will still be a scarce commodity and they don’t want to risk production going offline then if there are drastic price cuts now.”
Christopher Plummer, managing director of Metal Strategies, a Pennsylvania-based consultancy, said world steel production could decline as much as 15 percent in the fourth quarter.
“In the second quarter of 2008, we were using 650 million tonnes of met coal on an annualized basis. By the second quarter of 2009, that number will drop to 560 million.
“That would be about a 15-percent decline in demand for met coal,” Plummer told Coal & Energy Price Report.
Citigroup said the sudden deterioration in steel demand has accelerated a seasonal destocking cycle for coking coal, which fuels steel-making blast furnaces. It noted global steel production is expected to fall 4.2 percent in 2009 as manufacturers cut production in the face of weakening demand.
Last month, the world’s biggest steelmaker, ArcelorMittal, announced job cuts in response to the global economic downturn, including indefinitely laying off 16 percent of its U.S. workforce as it cuts production here by 40 percent. Many other manufacturers have cut production.
“This cycle has seen an unprecedented level of steel production cuts,” Citigroup’s note said. “If underlying global steel demand continues to fall, cold hearth shutdowns could be more pronounced.”
The note said continuing curtailments in production are likely to result in delays to price settlements.
“Neither producers nor consumers see it in their interest to settle annual prices in such a turbulent market,” it said.
Tags: coal, investment, steel