Key global metallurgical coal price indicators are still "flashing caution" despite reasons for optimism in the U.S., Seaport Global Securities LLC analyst Mark Levin warned in an Aug. 13 note.
Chinese blast furnace profitability, Chinese rebar prices and European steel prices are sending negative signals about the future of metallurgical coal prices while U.S. hot-rolled steel prices and Australian export trends are sending mixed market signals about the future of the market. On the other hand, ongoing constraints on U.S. metallurgical coal supply and the higher price difference between importing metallurgical coal into China versus buying it directly are offering reasons to be optimistic about the potential of metallurgical coal prices.
"We continue to believe most investors are bearish when it comes to met coal and the equities that have the most leverage to their price movements," Levin wrote. "We think this is due to a myriad of factors, most of which relate to concerns about a global economic slowdown and its potential impact on steel demand."
Absent a major supply disruption or global trade deal, Levin suspects metallurgical coal prices will, at best, remain range-bound. Concerns around the demand for steel would need to abate before metallurgical coal prices could go significantly higher, he added.
U.S. metallurgical coal producers faced weather, geology and financial troubles that led to a disappointing 2019 so far, Levin wrote. Even in a relatively strong pricing environment, several metallurgical coal producers continue to struggle, Levin wrote, pointing to the recent bankruptcies of companies such as Blackjewel LLC and Cambrian Coal Corp. U.S. metallurgical coal exports are off 8% through the end of June.
"An 8% year-to-date decline in met coal exports begs an interesting question: if the U.S. can't grow its met coal production in a $200/ tonne met price environment (which is roughly what the price has averaged the first six months of the year), when will it ever?" Levin wrote. "Getting coal out of the ground, as well as attracting outside capital, remain as difficult as ever. We think this dynamic remains a structural positive for the met market. The U.S., which has typically been the safety valve for international customers when things go wrong elsewhere, doesn't seem to be showing any ability to grow volume."