--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Nov 27 While Asia's
market for thermal coal appears structurally oversupplied, the
opposite may be true for coking coal, where rising Indian steel
output is likely to lead to a deficit in the next few years.
China tends to be the focus of the steel market given its
status as the world's largest producer, but India is likely to
take over the mantle as the fastest-growing producer of the
metal within the next few years.
India's steel capacity could almost triple between 2010 and
2020 to reach 179 million tonnes a year, Somdeb Banerjee, Tata
Steel's executive for South Africa, said last week at the
Coaltrans Mozambique conference in Maputo.
While this pales in comparison to China's current capacity
around 850 million tonnes, it's likely that China's steel-making
binge is over given its market is already oversupplied.
This means China's steel-making capacity is unlikely to rise
much above 1 billion tonnes in the next few years, which will
limit its need for coking coal supplies.
It's also likely that China's additional coking coal demand
can be met from neighbouring Mongolia, which is bringing new
mines into production and currently lacks the infrastructure to
send the coal anywhere other than China.
But India is nowhere near as lucky as China in having a
captive coking coal supplier on its doorstep, and the South
Asian nation will increasingly have to rely on seaborne imports
to meet its demand for the steel-making ingredient.
India imported 31.8 million tonnes of coking coal in the
last fiscal year and this may rise to at least 37 million tonnes
in the current year.
Domestic coking coal output is unlikely to rise in the
future, given India's reserves are biased toward lower-rank
Given that about 770 kilograms of coking coal are required
to make one tonne of steel, India's planned capacity growth will
require significant coking coal imports.
While all the capacity may not be used, even a 50 million
tonne increase in steel output will translate to about 39
million tonnes in additional demand for seaborne coking coal
within the next few years.
This is just the Indian picture, and even assuming that
China doesn't import demand any more than its current 37 million
tonnes from the seaborne market, it's possible that other
developing nations will also increase steel output, and by more
than any declines that may occur in Europe.
The question then becomes: are the world's miners able to
meet the potential demand for coking coal that may materialise
Here the answer becomes trickier, because on the surface
there appears to be enough supply being developed.
But, and it's a big but, new mines and related
infrastructure are now highly capital intensive to build and are
often challenging to build, factors that more often than not
result in long delays and cost overruns.
A case in point is Mozambique, the big hope for future
coking coal supply.
While the southern African nation has ambitious plans to
export as much as 100 million tonnes of coal in the next decade,
it would be something of an engineering and financing miracle if
all of this happens on time.
Among the major projects underway are mines by Brazil's Vale
, which aim to eventually producer 8.5 million tonnes
a year of hard coking coal, and Rio Tinto's two mines,
planned to eventually produce about 25 million tonnes of coking
Other projects include those of Jindal Steel & Power
, Beacon Hill Resources, ENRC,
Nocondezi Coal and a venture involving Talbot Group,
Nippon Steel, POSCO and Anglo American
Mozambique's coal exports from its own mines are expected to
be around 4 million tonnes this year, showing just how far the
country is from achieving its aims.
The main problem is a lack of suitable rail and port
While these issues can be overcome, the plans to refurbish
existing two rail lines and build another have been slow to
The improvement of the existing 570 kilometre Sena line,
which links the coal mines in Tete province to the port of
Beira, is behind schedule but should be largely finished by the
end next year.
The other existing line through Malawi needs extensive
rehabilitation and a new line around the bottom of Malawi to the
port of Nacala is still in planning stages.
Both of these railways would be around 1,000 kilometres long
and have to pass over mountains and across floodplains, adding
to cost and complexity.
What this means is that Mozambique's coal output should rise
to about 20 million tonnes within the next two years as the Sena
line ramps up, but then may flatline for several more as the
infrastructure is put in place.
If Mozambique isn't going to supply India's coking coal
needs, then the next best bet is Australia, already the dominant
force in the seaborne trade, with shipments this year likely to
total about 162 million tonnes, well ahead of the 58 million
tonnes by the United States and the 31 million tonnes by
But Australian producers are also under the cost-pressure
gun, with Marius Kloppers, the chief executive of number one BHP
Billiton, saying last month that it was hard to justify
expanding coal mines in the current environment of lower prices,
higher taxes and royalties and a strong Australian dollar.
BHP has put its Peak Downs project in Australia's Queensland
state on hold, and has urged the state and federal governments
to work with companies to make them more competitive.
Of course, there would be nothing like increased demand for
coking coal and limited available new supply to drive the price
higher, which in turn would make new projects more attractive.
Coking coal prices are currently around half of the more
than $300 a tonne peak reached in the aftermath of the late 2010
Queensland floods, which severely curtailed output.
If India's planned steel capacity comes on line before the
new coking coal projects, it's quite possible prices will once
again return to near record levels in the next few years.
(Editing by Miral Fahmy)