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US met coal supplies, exports face sharp drop in 2020: investment bank

Highlights

Domestic coking coal consumption to fall and recover next year

US met coal exports may drop to 42 million st in 2020, down 24%

India in future may account for more than one-third of seaborne coking coal demand

London — US metallurgical coal supplies may fall sharply in 2020, and stay relatively low in 2021 on weaker consumption in North America and Europe, according to US investment bank Benchmark Company.

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Domestic US coking coal consumption is due to fall this year and make a cautious recovery next year – dependent on coronavirus disease outbreaks – after higher-cost blast furnaces were idled due to weak demand.

"We expect a modest recovery in 2021, which takes into account the unusual circumstances of this year, where we saw sub-$500 HRC pricing, auto consumption fall off a cliff, and weak manufacturing," Benchmark's managing director and senior analyst Mark Levin said in an interview Aug. 25.

US met coal production may fall to 57.7 million st in 2020 from 73 million st in 2019, and exports are expected to drop to 42 million st in 2020 from 55 million st, a decline of 24%, Benchmark said.

Exports may then recover but only to 46.1 million st in 2021 and 49.3 million st in 2022, based on its forecasts

Benchmark's Levin has covered the coal mining and railroad sectors closely for over 20 years, and saw US met coal exports peak last at 61.5 million st in 2018, and hit 70 million st in 2012.

Over that time, US steel markets have increasingly become dominated by electric arc furnaces, using scrap and metallics and moves toward DRI and new EAF capacity limit coking coal demand growth at home.

As steel and industrial activity make for a slower recovery in North America and Western Europe, this will leave growth in demand for US met coal more dependent on Asia's imports, and perhaps Brazil.

Several blast furnaces have restarted in Brazil, which saw pig iron output grow 5.9% in July on a year earlier, while output over January to July is down 19%, according to World Steel Association data.

Markets such as India and Turkey, where US met coal exports have been comparatively healthier this year, may help to balance lower demand elsewhere.

INDIA DEMAND

"With growth likely to continue in India, it's not unreasonable to think in 10-15 years that it will account for more than a third of seaborne coking coal demand," Levin said.

"The demand centers will remain in Asia, and India will play a more dominant role in the way things go."

India is recovering iron and steel output after a sudden huge drop during the second quarter, while the US and Germany see pig iron rates in July down 29% on a year earlier.

Japan's demand for US coking coal may have been hit by higher spot freight rates and still weak pig iron rates and, down 34% in July, while South Korea, another major US met coal importer, is faring better as output recovers to 2019 levels.

The US currently has steeper freight differentials into northeast Asia and India, after a recovery in dry bulk rates led by iron ore laden Capesizes. This is limiting the competitiveness of US coals sold spot into Asia.

With lower volumes in several Atlantic markets and Japan, US miners saw coking coal shipments fall in Q2, with idling at some mines brought on by the coronavirus pandemic.

Work turning around mining operations to focus on higher productivity, and tweaking portfolios to lower costs have reaped dividends, as unit costs at Contura Energy, Arch Resources and Warrior Met Coal remained low in Q2.

MINING COSTS

Mining and sales costs per ton lower than Wall Street expected has injected some optimism for miners to weather weaker demand during the coronavirus pandemic, and emerge stronger next year.

"On the positive side, companies [US miners] did a great job managing cash. In many cases, the cash burn was a lot less than expected," Levin said of Q2 earnings.

Lower cost mines, mainly longwalls, are still profitable at low export coal prices, and more sales volumes are expected to improve unit costs further.

US rail capacity is adapting with business trends, reallocating resources, and adding services to the intermodal markets, Levin added.

Railroad services may be a concern longer term, and the US may be less equipped to suddenly turn into a swing supplier to the seaborne met coal markets and export back at a 70 million st/year pace immediately.

There is latent capacity in the US to meet demand and orders, especially with weaker thermal coal exports.

"If there were another surge -- likely due to a major weather event in Queensland -- I feel there will be a healthy call on US coking coals," Levin said.

"However, in the world in which we live, one where there are no material supply events, it's hard to envision a surge. But coal is an outdoor sport, and all sorts of crazy things happen."