1 Oct

China—global iron ore and met coal industry’s lifeline

WRITTEN BY Mike Sonnenberg

Biggest steel producer in the world

As we saw in Part 1, China accounts for almost half of the world’s raw steel production. In 2013, China produced 779 million tons of steel. This was a 7.5% increase over 724 million tons in 2012. In the first eight months of 2014, China produced 550 million tons of raw steel. However, the growth moderated to 2.6% as the construction, shipbuilding, and industrial activities slowed.

China’s steel production is expected to peak by 2017–2018 at ~880 million tons a year. The infrastructure sector’s demand for steel will slow down. China’s steel industry’s Purchasing Managers Index (or PMI) remained low at 48.4 in August 2014. This was a result of weak outlook for new orders.

Met coal is used in steel production. Key producers (KOL) of met coal include Alpha Natural Resources (ANR), Walter Energy (WLT), Arch Coal (ACI), and Peabody Energy (BTU). The met coal is produced through its Australian mines.

China—global iron ore and met coal industry’s lifeline

Shift in steel demand

As the economy matures, demand shifts from long products—used in constriction and infrastructure—to flat products—used in consumer goods like refrigerators. This is evident in China’s changing steel mix. From 2010 to 2013, the share of construction—long products—in steel consumption increased from 64.8% to 72.8%. However, the share dropped to 71.4% in 2014.

There’s a large real estate inventory available across the country, but the outlook for the construction sector remains weak. The weak outlook directly affects the outlook for steel. Construction accounts for the largest share in steel consumption. Read the Market Realist series, “Must-know: Why the Chinese slowdown impacts steel companies” for more details.

In contrast, the share of flat products—used in automobiles, home appliances, and machinery—has increased. As China continues its growth trajectory, the trend will get firmer. Domestic consumption will drive the demand for automobiles and home appliances.

Impact on met coal producers

The slowdown in China’s steel production has substantially impacted met coal producers, iron ore producers, and shipping companies. Since 2007, China accounted for the majority of the share for U.S. met coal exports. However, the Chinese economy is slowing. There are rising production levels in Mongolia and Australia. The market is oversupplied.

As a result, U.S. coal producers are caught in a tight spot. U.S. met coal exports to China have fallen to 4.5% of total met coal imports by China in 2014—from 8% in 2013. During the same period, Australia and Mongolia’s combined share increased to 71% from 60%.

In this series, we discussed China’s power sector and thermal coal demand. We also analyzed the steel sector and met coal demand. What does all of this mean for U.S. coal producers? What’s the outlook for U.S. coal exports to China? We’ll discuss this in the next part of the series.

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