Metallurgical Coal: The New Hot Topic

Metallurgical coal, also known simply as met coal or coking coal, has quickly emerged as one of the handful of commodities that are both in short supply and in critical need by certain industries - in this case the integrated steel sector.

Integrated steelmakers need coking coal to help reduce iron ore. Roughly half of all U.S. steelmakers are so-called mini-mill producers who melt ferrous scrap as their primary raw material and don't require specialty coal. But the majority of the world's raw steelmaking capacity is now in Asia, where the majority utilizes the traditional integrated process.

China several years ago became the largest steel-producing nation and now single-handedly produces more than half of the world's steel, a large majority of which is carbon steel as opposed to specialty steel.

Even so, more steel capacity is being built. Currently there are at least four major new projects planned or under construction in coastal regions of China. These include the WISCO Fangcheng project in Guangxi and BaoSteel's Zhanjiang project in the southeastern portion of China, and the Bayuquan and Caofeidian projects in the northeastern portion of the country.

The new projects, which will add an estimated 100-120 million tonnes/year of capacity, generally utilize larger blast furnaces to take advantage of increased efficiencies and economies of scale. Such blast furnaces require high quality hard coking coal to run at optimum efficiency. Generally, the larger the furnace capacity, the less tolerance it has for ash and sulfur components within coking coal. The harder the coal, the lower the percentage of these residuals it generally contains.

Chinese coking coal imports meanwhile have gone from practically zero in 2008 to about 30 million tonnes in 2009 and an estimated 45 million tonnes last year. Estimates for 2011 are that China will import 50 million tonnes.

China's current GDP growth target is 7%-8%, although recent indications show growth above 8%. The country's industrial production growth rate is much higher, in a range of 10-15%, according to recent estimates by Goldman Sachs. Increasing demand for coking coal is assumed to be a long-range trend for China.

Exacerbating the situation is the fact that China, while it has ample reserves of thermal coal, has relatively low reserves of coking coal, estimated at approximately 28% of total coal reserves. But only 10% of total reserves comprise high quality hard coking coal.

Currently most of China's coking coal comes from Shanxi province, where production ranged from 150-170 million metric tons in 2005-2008 but fell to about 100,000 tonnes in 2009. In fact, production in the province had already begun to decline sharply after 2007. There are plans for recovery in Shanxi, but they are progressing very slowly according to industry observers. Additional supplies of coking coal come from Guizhou, Henan, Hebei, Yunnan and Anhui provinces, but production from each is only 10-40 million tonnes/year.

One company that anticipated the factors involved in this critical market is Canadian mining house Teck Cominco. In just five years the company has transformed itself from a metals miner with a focus on zinc to one driven primarily by coking coal. The company has done this through a series of acquisitions, most of which are situated in western Canada within easy reach of port facilities and well-positioned for exporting to Asia.

The company earned 55% of its operating profits from coal, 27% from copper and just 17% from zinc in its most recent quarter (fiscal 2010 Q3). As recently as 2007, by comparison, coal accounted for just 17% of profits.

The company plans to further expand its coking coal output by about 22% to 28 million metric tonnes/year over the next two years (from 23 million tonnes), and boost production by 50% within four years. By 2014 Teck hopes to be producing approximately 33 million tonnes of coking coal annually from seven mining subsidiaries.

Teck expects production in the current quarter to range between 5.0 and 5.5 million tonnes, down from 5.25 million tonnes in the first quarter of 2010, due to adverse weather conditions. The company envisions calendar 2011 sales of coking coal in a range of 24.5 to 25.5 million tonnes, according to guidance released in mid-January.

The company is already the world's second-largest exporter of coking coal and the largest in North America. As recently as 2005, however, the company was producing only 10 million tonnes. The seaborne market for high quality hard coking coal is currently estimated at 220 million tonnes/year.

Chinese steel mills currently account for only about 15% of Teck's total coking coal sales, but that is liable to change as the company expands output at the same time that Chinese steel production increases.

Brett Hartke is a contributor to ResourceInvestor.com who has more than 20 years of experience researching and writing about commodities and the metals markets.
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