Coal Age

MAY 2019

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May 2019 27 export markets continued A decline in demand from western Europe will give way to an increase in demand from Asia. Atlantic Basin suppliers will need to make a transition. Australia is China's largest suppli- er. China's customs clearance on Aus- tralian coal imports has slowed, and while no official mandate has been issued to restrict Australian cargoes, ports are behaving differently with customs clearances. The ports are reportedly only discharging Austra- lian coals during daylight hours and sometimes only for six hours per day, which is a 75% reduction in port-dis- charge availability. This has slowed the entry of Australian coal and result- ed in strong pricing, which works in favor of the Chinese domestic market. Some Chinese ports are taking three to four months to discharge and clear customs for Australian coal car- goes. "Xcoal has sold a couple of coal cargoes during this period and it was discharged and cleared in less than 30 days," Cron said. "That's a significant advantage, especially when the pric- es are unclear two and three months down the road." Despite the trade dispute, China continues to show interest in low-ash, low-sulfur, low-vol coking coals from the U.S. The U.S. alternative is current- ly "taxed" at 28%. Buyers understand they need to absorb at least some of the 25% import tariff if they buy U.S. coking coals, Cron explained. The out- come of government talks are not yet final, but coal has been identified as a key negotiating chip and a way to re- duce deficit. Upon a trade resolution, China may shift to U.S. thermal and coking coal at the expense of Australia. The real growth market for the U.S. and Australia will be India. India im- ports the most seaborne coking coal as it has no significant domestic cok- ing coal supply. Indian steel mills have been able to increase steel production even with the high prices. In less than five years, India steel production has grown by 36 million mt. Essar Steel, currently producing 10 million mt, could be acquired by a joint venture between Nippon Steel and Arcelor- Mittal. That could increase its steel production. JSW has plans to grow to 50 million mt from 33 million mt to- day. "The Indian growth target is 300 million mt of steel by 2050," Cron said. "That's a bit unlikely, but you can eas- ily make the case for an additional 25 million to 50 million mt, which would be a game-changer for the seaborne coking coal market that may finally allow some new investment." Short-term Outlook For coking coal, Cron believes pro- ducers should brace for a price cor- rection over the next one to two quarters. "We have been wrong for a couple of quarters saying that there will be a price correction," Cron said. "If you look at the external factors, there should be a price correction. China holds the cards with import ar- bitrage, economic stimulus and steel production. On top of that, there are significant inventories in Australia waiting to hit the market and they would likely discount prices." On the thermal coal side, the de- mand growth in southeast Asia is real. "It's challenging logistically to reach customers in southeast Asia due to restricted drafts and expensive sea freight," Cron said. The largest ther- mal supplier for that region, Indone- sia, could grow supplies to keep a lid on those prices. The opportunities for U.S. ther- mal coals lie in the Mediterranean (Turkey) and Indian markets. "The market for U.S. coals off the East Coast [NAPP] and the Gulf of Mexico [Illinois Basin] is India," he said. "And, it's a big enough market to absorb that coal, but there are factors that could challenge prices, such as alter- native fuels (petcoke) or low-quality coals from other Asian sources. The U.S. produces high-quality coals the world sees as a staple part of its blends. It should garner a pre- mium, but sulfur levels for some U.S. coals could negate that premium. "We believe there is an export market for U.S. thermal coals," Cron said. "The current prices present a challenge. We will find a way to get that coal to market, especially for India."

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