This five-part story series examines the coking coal market from a few angles. The first part focuses on pricing evolution and spot liquidity. The second analyzes how trade flows have changed, this third part traces the rising importance of environment, social and governance criteria, while the fourth takes a deep dive into the workings of coal trading platforms that may inform spot price assessments. The final part examines the current state of the spot market and explores directions for future evolution.
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Australia's resource and energy export revenue is forecast to hit a record A$464 billion ($310 billion) in fiscal 2022-23 (July-June), A$5 billion higher than the government forecast in December, due to an anticipated lift in metallurgical coal and iron ore earnings and a weaker-than-expected exchange rate against the US dollar.
After both metallurgical and thermal coal prices rode the surge in energy prices in 2022 stemming from Russia's invasion of Ukraine, the Australian government sees its metallurgical coal exports rising to 172 million mt by FY 2027-28 from 163 million mt in FY 2021-22.
Most of the volume will go to India, despite China having started buying Australian coal again in February after unofficially banning such imports in October 2020.
China's coking coal imports have peaked, according to the Australian government's latest Resources and Energy Quarterly issued April 3.
Australian producers would prefer a long-term offtake contract with a steelmaker in India over one in China, which stopped trading with them during the unofficial ban period, AME Research Managing Director Lloyd Hain said in an interview.
"There will still be a market for low-sulfur, high-quality premium coking coal from Australia in China given its blast furnaces are designed around that, but it's tough for us to see how exports [to China] could sustainably go back to what they were before the ban," the Commonwealth Bank of Australia's mining and energy commodities research director Vivek Dhar said in an interview.
"Chinese coal imports from Mongolia have lifted significantly in the last 12 months, even with COVID-19 impacts limiting cross-border transport -- and they're building out more railways between Mongolia and China to boost those numbers," he added.
India became a bigger importer of Australian coking coal than China in 2018, according to S&P Global Commodity Insights data, and Australian producers see that trend strengthening.
Coronado Global Resources Inc. CFO Gerhard Ziems told a Feb. 22 analyst call that global seaborne coking coal demand is expected to rise 43% by 2050, driven by India's planned blast furnace steel production.
BHP sees India's steelmaking sector underpinning "decades of strong margins" for its coking coal assets in Australia, noting in its results for the second half of 2022 that India in the leadup to its 2024 general election could buck the trend of ex-China steelmakers being under pressure "as the general industrial climate softens" after global steelmakers' margins were squeezed amid lower sale prices and high input costs over H2 2022.
Net zero drive
As the world's second-largest steelmaker after China, India's efforts to reach net zero will rely heavily on decarbonizing that sector, according to The Climate Group, which launched the SteelZero demand initiative by steel users in India in July 2022.
"Different coals emit different amounts of carbon dioxide in relation to the energy they produce when utilized. Australian and US metallurgical coals in general tend to be of a higher quality [more efficient, less carbon intensive] than the coal produced by competitor locations," Ziems said in an email interview. "Coronado is well positioned to support Indian steel demand growth well into the future."
Metallurgical coal is also a critical material in the generation of renewable energy infrastructure such as wind turbines, solar, hydro, nuclear power infrastructure and electric vehicles, according to Ziems.
Though India's government is initially targeting green hydrogen and carbon capture, utilization and storage to meet these goals, these technologies are still decades away, according to Pranay Shukla, director of research and analysis of dry bulk commodities and shipping at S&P Global Commodity Insights.
Using Australia's high-quality coking coal also means less coke needed per metric ton of steel, enabling steelmakers to maximize their use of renewable energy as their power source, Hain noted.
With India already receiving more Australia's coking coal than any other destination, the next biggest competitor for meeting India's needs is the US, which has only exported 6.3 million mt to the subcontinent over the past four quarters, compared to 49.8 million mt from Australia, according to S&P Global data.
A free trade agreement between Australia and India signed in December 2022 will ensure Australian coking coal is preferred over the US because it incurs no duties, while the US will be supplying a European market weaning itself off Russian energy sources, Shukla said.
Coal accounts for 74% of Australia's overall exports to India, of which 71.4% is coking coal, according to India's government.
Competition for supply
Australia's government sees US coking coal production "losing steam" in 2023 after having risen by about 2 million mt to 43 million mt in 2022, before bouncing back to 45 million mt by 2028, while Canada's exports should lift as Canada Coal's Grand Cache mine restarts and remain robust at around 29 million mt in 2023 and 2024 before easing to around 25 million mt by 2028.
Russian exporters face a tough outlook given the impact of western sanctions, while Mozambique's exports were expected to surge in percentage terms to around 7 million mt by 2028 from 4 million mt in 2021.
Despite this supply growth elsewhere, Mozambique's coking coal has quality issues and transport logistics for North American production mean its high-quality coal is far more costly, further strengthening the subcontinent's likelihood of preferring Australian product, Hain said.
"It's a combination of quality and location, which is why we're in the box seat to benefit from India looking to lower the carbon intensity of its steel industry by using existing technology," Hain said. AME sees India's blast furnace production adding another 60 million mtt of capacity by 2030.
While weather events have disrupted Australian supply in the recent past, the government sees coking coal exports benefiting from a "solid pipeline of investments" including the Ironbark, Goonyella, Vickery, Olive Downs and Hillalong mine developments, plus Illawarra Metallurgical Coal's new plan announced in February to invest US$248 million to implement a single, more efficient longwall configuration at its Appin mine.
Australia's investment in coal exploration surged 30% year on year to A$70 million in the fourth quarter of 2022, according to the government, though that "may edge down in 2023 as prices correct."
In recent analyst calls, Australian miners bemoaned the difficulty in gaining approvals and financing for new mines in order to meet surging demand.
"It's worth considering just how difficult it has been to get new mine approvals and funding for those new mines in recent years," Yancoal Australia CEO David Moult told a March 1 call.
"Coal prices would not have reached the levels we've seen in 2022 if new supply had been incentivized."