Coal Age

MAY 2019

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Page 27 of 43

26 May 2019 export markets continued that has kept supply in check, result- ing in strong pricing." Shifting to thermal coal exports, Cron said the market grew by 70 million mt last year and the U.S. accounted for 30% of that growth, which relates directly to the shift- ing market dynamics in the Atlantic Basin. Indonesia added the most to the growth, but this was lower grade coals. Russian exports were also up as they capitalized on a depreciating ru- ble, which was down 20% to the U.S. dollar. Australian thermal exports were up marginally. The market saw declines year-on-year from Colom- bia and South Africa. Colombia had weather-related issues that affected production and South Africa had do- mestic coal shortages. Looking at API 2 and API 4, which represent the Atlantic Basin and In- dia, respectively, these indices were ranging from $90/mt to $95/mt in December 2018. API 2 is a delivered price into Europe and that is how most of the U.S. thermal coal from the East Coast is priced. API 2 prices have dropped more than 30% from December 2018 to present. "Since the high in October 2018, we're down more than 40% and that's significant for U.S. coal operators," Cron said. "Coal producers expected a downturn in prices, but these pric- es are extremely challenging and not sustainable for future thermal coal growth. API 2 is $58/mt delivered to Europe. That means a NAPP mine would receive less than $20/mt after paying the transportation cost. For- tunately, many of these NAPP mines are highly efficient operations and they have hedges with forward sales to monetize the 2018 levels to sustain this downturn." Looking at long-term market dy- namics, a diminishing thermal market in western Europe will force Atlantic Basin suppliers to transition to the Pacific Basin to accommodate Asian growth. "Europe will eventually be- come a 10-million-mt thermal coal market," he said. "The challenge for the U.S. and other Atlantic Basin suppliers will be to reduce costs to take advan- tage of Asian markets going forward." The U.S. for its part has shown a lot of resilience in the last two years essentially doubling thermal and met exports. "That's a testament to the mines, the service providers and the rail and port infrastructure despite challenging times," Cron said. "That's also why they call the U.S. a swing supplier for export markets." Market Catalysts to Watch Coal consumption is directly correlat- ed to economic growth. The themes more recently have been decelerat- ing growth, which should lead to a deceleration in steel production and coal-intensive pig iron production. Pig iron production year-to-date, through April 1, is down 1.3% when China is excluded. When China is in- cluded, the growth in total pig iron production is 5.1%. "This is what's going to support pricing for met coal markets," Cron said. "The concern is that Chinese fig- ure of 9.3% pig iron growth in the first three months of this year, compared to last year. That comes on the back of very strong fiscal economic stimu- lus. Growth can only be stimulated so many times before it begins to have a deleterious effect. If the trade dis- putes continue and U.S. does not find a resolution with China and, if Aus- tralia continues to experience issues with China regarding the import of its coal, this number could decrease." China is producing steel at record levels. In March, Chinese steel pro- ducers set their highest monthly out- put and then they broke that record in April. "Again, this was with strong fiscal stimulus in the first quarter to counteract other trade issues, but this is a very good scenario for selling coal into China," Cron said. In 2016, Chinese steel production looked as if it had reached a plateau. "At that time, many thought Chinese steel output would start to decline by 1% to 3% per year, but that has not been the case," Cron said. Steel production requires coal and China does have a reserve base. "They have the volume, but not the quality," Cron said. "There is a need for low-sulfur imports. Many of the Chinese steel mills are located on the coast, which places the domes- tic producers at a logistical disad- vantage. They would have to pay a premium to transport coal to these coastal steel mills, which justifies the coal imports." Cron estimated a mar- ket arbitrage of $20/mt in favor of seaborne coals. In March, Chinese steel pro-ducers set their highest monthly out-put and then they broke that record in April.

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