Australia: Structural reforms boosting met coal prices - Westpac

Sandeep Kanihama FXStreet Contributor

Justin Smirk, Research Analyst at Westpac, suggests that firmer supplies & softer demand will ease coal prices in 2018 but the risk of supply shocks remain for the Australian economy.

Key Quotes

“The robust trends in the global demand indicators at the end of 2017 continued into the first quarter of 2018. Through Q1 the global backdrop was distinctly more robust as demonstrated by the further lift in both global manufacturing PMIs and Westpac's measure of global trade activity. Since then, we have seen the PMIs started to soften suggesting that momentum may peaked.”

“The recent renaissance in met coal prices has been underpinned by significant reforms in the Chinese steel industry.”

“This is not to say the restructuring of the steel industry hasn't had a positive impact on met coal. In fact the closure of EIFs has been a boon for met coal prices.”

“By using higher grades of ore you can also lift the output further if you use higher grades of coke, that is more carbon per tonne so more heat produced per tonne of coke, thus allowing you to squeeze in a bit ore iron ore into the furnace. So a focus on the quality of inputs is behind the significant lift spreads for higher grades of coking coal.”

“Looking forward, we are expecting the supply of met coal to firm in China. Locally, Chinese mines have been signing favourable long-term contracts with local steel mills locking in higher prices supporting the improvement in margins and ensuring growth in local production. There are also expectations for an increase in supply in the seaborne market – Wood Mackenzie is forecasting a 23mt increase in supply in 2018 of which 6mt is expected to come via a lift in US exports and another 12mt from an expansion of Australian exports.”

Author

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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