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How China Sparked the 2Q15 Metallurgical Coal Market Downfall

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Slowing Growth

China’s National Bureau of Statistics recently released its 2Q15 GDP growth figures on July 14. The Chinese economy grew at 7% in 2Q15, higher than analyst expectations of 6.9%. But this growth rate is much lower than the 9.7% GDP that the country enjoyed in 1Q11, when coal prices peaked.

In any case, analysts are questioning the numbers because they feel that such growth is not visible in ground-level activity and other economic indicators. China’s industrial production, which grew by around 15% in 1Q11, grew by only 6.8% in 2Q15. China’s manufacturing purchasing managers’ index (or PMI) is down to 50.2 in 2Q15 from 53.4 in 1Q11. A PMI above 50 indicates expansion while a PMI below 50 indicates contraction.

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Chinese steel industry

A bigger worry for met coal producers is the state of the Chinese steel industry. For years, China has been the biggest importer and consumer of metallurgical coal. However, the Chinese steel industry is battling a slowdown amid a glut in the market.

China’s steel industry PMI dropped to 37.4 in June 2015 from 60 in January 2011. China’s steel production has grown by just 1.3% in first six months of 2015 over the same period last year.

Global met coal prices

As we discussed earlier in this series, benchmark met coal prices have fallen from $330 per ton in 1Q11 to just $93 per ton in the current quarter. At this price, met coal producers (KOL) across the globe, including Alpha Natural Resources (ANRZ), Arch Coal (ACI), Rio Tinto (RIO), and Peabody Energy (BTU), are struggling.

US met coal producers are having the toughest time due to locational issues and the weaker Australian dollar. A weaker Australian dollar puts Australian met coal producers at an advantage because coal exports are priced in US dollars while these producers’ costs are in Australian dollars.

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