Security the word of the year in US met market

Price consensus has begun to build regarding North American domestic coal purchases for calendar year 2018. Netbacks will be below those available in the hot export market, but US producers are likely to covet the security of year-long contracts available on the domestic side.

Multiple sources anticipate low-vol coal being priced to domestic consumers in a window of $108.00-112.00/short ton FOB mine.

Mid-vol coal is scarce, and prices are likely to reflect the fact. Anticipate the market coalescing somewhere near $115.00-120.00/st FOB mine.

High-vol "A" is endemically tight and has priced in recent months at par or above LV coal. But recent production problems from some key LV mines have helped the pendulum to swing just a bit. It appears HVA might realize domestic prices around $105.00-110.00.

High-vol "B" availability is stronger in the US than is the case with the other qualities, and price outcomes could be broad. Some of the stronger HVB coals - including some that might better be characterized as A-minus quality - could fetch prices above $90.00/st FOB mine. Weaker HVB coals could take a substantial discount to the high-end price.

It is early to forecast, but the HVB price range might be somewhere around $85.00-95.00. Coals not quite meeting a true HVB spec could be priced significantly lower as the thermal market is still sufficiently thin to lessen producer options.

Whatever the price outcomes, domestic market developments have come at a dizzying pace relative to tradition. All of the North American cokemakers have chosen to issue tenders prior to September 1, which is not usual.

The clear message - there is some concern about supply availability, and buyers do not want to get caught last in a game of musical chairs. Beyond supply tightness, buyers are probably wary of the potential impact of the anticipated imposition by the US of tariffs on imported steel, which as has been reported here could reduce import volumes by 10-15%.

At this point, the Trump administration appears poised to announce tariff impositions in October. There is little doubt among sources such tariffs will be imposed. The question is how stiff the tariffs will be.

Reduced steel imports could lead to an increase in US coke production, which in turn would increase the coal appetite among domestic cokemakers. There are caveats.

While the tariff scenario is true "in principal," a source noted there is danger of it creating some "false hope with regard to increased domestic demand for coking coal." The source pointed out "any Section 232 ruling might only reverse the 8% gain in finished steel imports we've seen over the past 13 months through July, year/year.

"More importantly, semi-finished steel imports are up 26% y/y over the same running 13-month timeframe, suggesting that until the all-clear horn sounds those mills shuttered over the past 24 months will remain down."

Even as coal producers look at a reasonably strong poker hand, domestic buyers have an ace in the hole. Their willingness to book fixed price contracts of a year in length is particularly valuable at a time when capital access is a major priority. Domestic contracts provide a base for mining operations and give producers some paper to show the bank.

There is some trepidation among US suppliers that a subset of producers could be prepared to sharpen their pencils and improve their initial offers should they face the loss of domestic business. If such were to be the case, HV prices could land a bit lower than early indicators suggest.

Given the death of MV and LV, it seems less likely producers will be willing to reduce their price expectations. Perhaps that will change if significant longwall production is restored more quickly than anticipated.

In any case, the supply/demand balance for US met, including the combined North American and seaborne markets, creates a bit of a conundrum, a source noted. Prices are high, and coal supplies are tight, so buyers are prepared to pounce on the tonnage available.

But there is a large bearish indicator.

"The total market for US coking coal and PCI is approaching 70 mm tonnes, and that's about where the supply is at present… but US suppliers in H1 2017 have had to fill in almost half of that 12 mm-t gap left by Australia.

"As Australian supplies increase, so too will the availability of product out of the US. This will occur over the next six months, leaving one to wonder 'where have all the flowers gone.'"

Then again, "another scenario could play out whereby non-Chinese iron production begins to rise over the next 12 months on the back of increased fixed asset investment as global growth starts to improve.

"The recent price action in the commodities market is suggesting this may be the case."

Domestic buyers clearly want to have their supplies in the bank before either scenario unfolds. We can conclude that security is the issue of the year - national security, which is the basis for potential steel tariffs; price security, which is the carrot for coal producers to seek domestic contracts; and supply security, which is the driver behind the early domestic market tenders.

Learn more about our coverage of the metallurgical coal market.

Jim Thompson is a Research & Analysis Director with IHS Markit.
Posted 5 September 2017

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.