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Met coal price drop not overly concerning as experts see market potential

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Met coal price drop not overly concerning as experts see market potential

Though the seaborne price on coal used for steelmaking has recently faltered, experts speaking at a coal industry event suggested the decline is likely cyclical and should see a midterm recovery.

Among numerous factors affecting the global coking coal market, China increased its steel output, which depressed the market for other steel producers, experts said. Australian coal miners also faced the effects of storms and infrastructure issues but have seen some recovery and will likely export more metallurgical coal this year.

Andy Blumenfeld, head of market analytics for Doyle Trading Consultants, a division of IHS Markit, said during an Aug. 13 presentation before the American Coal Council's Coal Market Strategies 2019 conference in Utah that he is more bearish on the global metallurgical coal market in the near term and more bullish in the midterm.

"We see some decline out of the U.S. right now, but we don't expect that to be a long-term situation," Blumenfeld told attendees, later adding in an interview after his presentation that "certainly the increase in metallurgical supply against questionable demand at this point is sort of why we see this softening in met prices."

Metallurgical coal prices remained fairly high for some time, Blumenfeld said, and some industry observers were wondering what was taking so long for them to drop to a level more in line with expectations. Blumenfeld expects prices to remain around the current $150/t to $160/t range in the meantime, assuming there is not a major shock to supply.

Several metallurgical coal producers announced expansion projects on their fourth-quarter 2018 and first-quarter 2019 earnings calls amid high global pricing. Those projects are likely still profitable given that most of them will serve as replacement capacity rather than as additional tonnage, Blumenfeld said. It would also take several years before miners delivered coal from those projects to the market, Blumenfeld said.

Matt Preston, Wood Mackenzie's research director of North America coal markets, said current pricing levels may support some of the endeavors, "but it will be a mixed bag." Whether producers move forward with the projects or not will largely depend on their ability to find a market for the coal.

"Most of these are relatively small operations that were always going to be very market-specific at the time that it came to actually starting production," Preston said. "They're relatively small capital cost projects, so they're easier to turn on and off as the market dictates."

Jason Fannin, senior vice president of metallurgical coal sales for Contura Energy Inc., said during his presentation at the conference that "the environment is still out there for sustained, favorable pricing for met producers."

As long as U.S. steel tariffs remain in place, the domestic market will remain strong, Fannin said.

Fannin suggested there may be opportunities for U.S. producers in Brazil given President Jair Bolsonaro's economic policies and intent to establish a free trade agreement between the country and members of its trading bloc with the U.S. India is also stepping up its metallurgical coal imports, Fannin said, noting that the nation's mills are "highly exposed to the export coal market."

However, the trade war between China and the U.S. seems to have only increased the former's desire to find new trading partners, Fannin said. Carbon taxes in Europe, the largest export destination for Contura and many other U.S. producers, have made it tough for mills to "hold their ground" as well.

Overall, U.S. coking producers need a healthy Atlantic market, Fannin said, but many are established in the Pacific sectors and there are opportunities for new markets in the region.