China has been the world’s growth engine for decades—especially since 2008. China is the largest seaborne coal importer—thermal and met. Met coal exporters (KOL) around the world—including Alpha Natural Resources (ANR), Walter Energy (WLT), Peabody Energy (BTU), and Arch Coal (ACI)—are anxious about China’s slowing growth.
China’s economy grew 7.3% in the third quarter—that’s the slowest pace in five years. A slowdown in China’s growth means less demand for steel. This leads to less demand for met coal. While China is slowing down, India is a bright spot for global coal exporters. Read more here.
China’s peaking steel production
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 compared to 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 raw steel production is expected to peak by 2017–2018. According to industry sources, it will peak at ~880 million tons per year. The infrastructure sector’s demand for steel will slow down. The steel industry’s Purchasing Managers Index (or PMI) remained low at 45.71 in August 2014.
World Steel Association lowered the growth forecast in China’s steel usage. It’s 0.8% in 2015. It was 2.7% earlier.
Rising production levels in Australia
Australian miners are moving tons in the oversupplied seaborne met coal market. So far this year, Australian met coal exports are up 12% to 120 million tons. New capacities have come online.
There have been 25 million tons of production cuts announced globally. Another seven to eight million tons of production cuts are needed to provide support to falling met coal prices.
Since Australian producers have an advantage over their U.S. counterparts in moving met coal into developing Asia, U.S. producers may have to proactively cut production to support the prices. However, production cuts have a negative impact on mining cost per ton. Fixed costs get divided among fewer tons.
China’s import tariff
China proposed a 3% import tariff on met coal imports. Australian producers are expecting to be exempt from the tariff. If China exempts Australian coal from the tariff, U.S. producers will be disadvantaged more.