The continual news blitz around high-profile commodities - gold, oil and copper - can make one forget that there are other commodities out there that are in shorter supply than any of these. Metallurgical coal, also known as coking coal or "met" coal, is an excellent example.
A relatively rare grade of coal, it is the raw material basis of metallurgical coke, without which two-thirds of the world's steel could not be made. Unlike thermal coal, its abundant and far less costly cousin, met coal is in short supply. It is produced in only a handful of countries in significant quantity. Prices have roughly tripled in less than five years.
This price strength has been evident despite the intervening global economic crisis, and a price pullback related to the recent across-the-board selloff in the entire commodity sector. Met coal prices have come down somewhat of late but are still relatively elevated in a range of $275-300/ton fob US East Coast port. To get some historical perspective, met coal was a little above $90/ton in early 2007 - a time when the economy was still booming and US steel mills were at full capacity. Today those same mills are operating at around 75% of capacity.
A major factor behind the high value of met coal was the major flooding in Australia in December and January, which seriously hindered production and caused prices to spike. At one point three-quarters of the coal mines in the state of Queensland (including both thermal and metallurgical coal) were shuttered. Producers are still trying to catch up.
On a much smaller scale, several North American producers recently experienced production problems based on their latest quarterly earnings reports. Among them, US-based Patriot Coal and Canada's Grande Cache Coal were obliged to cut 2011 production guidance.
Demand meanwhile has been rapidly rising, thanks in large part to the meteoric increase in Asian steel production in recent years, a trend expected to continue for an extended period. Chinese coking coal imports went from almost zero in 2008 to about 30 million tonnes in 2009 and the to an estimated 45 million tonnes last year.
This year China is expected to import about 50 million tonnes, according to an article by Brett Hartke published earlier this year by Resource Investor. Compare this import figure with a forecast made seven years ago that Chinese imports would reach approximately 55 million tonnes... but not until the year 2030!
Rio Tinto, one of the world's largest met coal producers, said in a presentation earlier this year that demand for this product is expected to grow at a compounded annual rate of 5.9% through 2020, The presentation, which cited data from Wood Mackenzie and RTE, indicated that greenfield projects will have to supply another 88 million tonnes of new met coal production capacity over the next decade in order to meet projected demand. That figure represents nearly 9% of 2010 global consumption of 998 million tonnes. Consumption is projected (by met coal data specialist McCloskey) to reach 1.27 million tonnes by 2015 and as much as 1.56 million tonnes by 2020.
China could see a 100,000-tonne shortage of met coal by 2015 according to a government report released in May this year - a significant problem for a country that is now the world's largest steelmaker. Met coal demand is also on the rise in other major Asian steelmaking countries such as India and South Korea. Thus demand from the Asian steel sector will continue to underpin met coal prices. Consider that it takes more than half a tonne of met coal to produce one tonne of steel on average.
Pure plays in met coal exist but are not numerous. The companies that account for most of global supply tend to be Europe-based mega-miners like Rio Tinto, BHP Billiton (co-headquartered in Australia), Anglo American and Xstrata, which mine an entire range of metals and energy products. Canada's Teck Resources (NYSE: TCK) has become a significant met coal producer since 2008, but it also is a relatively large miner specializing in a range of commodities.
There are, however, some mid-echelon producers that are largely or entirely focused on met coal. Such companies include Walter Energy (NYSE: WLT), Alpha Natural Resources (NYSE: ANR), and the above-mentioned Patriot Coal (NYSE: PCX), all US-based. A fourth US company, Cliffs Natural Resources (NYSE: CLF), is focused on iron ore and met coal. As mentioned, there is also an independent Canadian producer, Grande Cache Coal (OTC: GACHF). In my article published yesterday by Resource Investor (The Great Colombian Met Coal Rush) another approach is suggested in the form of several relatively new startup companies.
Chris Munford researches and writes about commodities, with an emphasis on metals, energy, and steel raw materials. He is based in the New York area.