« Coal To Drop As Steel Output Slows In BHP Setback
coal mining in india Coal used to make steel is set to drop to the lowest price in two years, eroding earnings at BHP Billiton Ltd. (BHP) and Rio Tinto Group (RIO), as European demand wanes and China shifts supply contracts to Mongolia from Australia.
The contract price may drop 11 percent to $200 a metric ton in the three months to Dec. 31 from $225 a ton this quarter, according to seven analysts and industry officials in a Bloomberg survey. The spot price in China fell 25 percent from the end of June to $177 yesterday, the lowest this year, according to data compiled by Bloomberg.
A deepening debt crisis in the eurozone has dragged down demand and prices of commodities, forcing the world’s largest steelmaker ArcelorMittal (MT) to shutter or idle plants in the region. Slowing economic growth in China, the second-biggest importer of metallurgical coal, has increased chances of output cuts at mills and further shrinkage in demand for the fuel.
“Steel demand in Europe is very weak and consumption has slowed dramatically in recent months,” said Tim Cahill, an analyst at J&E Davy Holdings Ltd. in Dublin. “It’ll get worse in the second half as government spending slows and banks stop lending to home buyers. Unless the U.S., Europe, China pump in serious stimulus, global steel demand will remain subdued.”
The EU produced 14.73 million tons of steel in June, the lowest for that month since 2009. Moody’s Investors Service cut the corporate family rating of Tata Steel Ltd. (TATA)’s European unit, which contributes two-thirds of the steelmaker’s output, saying further signs of weakness in the region’s steel industry will lead to slower recovery in Tata’s operating and financial profile. The outlook remains negative, Alan Greene, senior credit officer at Moody’s, said today in a report.
Possible higher supplies will also put pressure on prices after the BHP Billiton Mitsubishi Alliance, the world’s biggest exporter of steelmaking coal, resumed operations last month at its Queensland mines, pruning the risk of shortages. The venture supplies about 18 percent of global coking coal, according to a March 22 Goldman Sachs Australia Pty report.
“If BHP Mitsubishi mines are successful in bringing on significant output quickly, prices will possibly decline below $200 a ton,” said Jim Truman, a coal market analyst at Hill & Associates in Morgantown, West Virginia. “All steel companies will benefit and almost all coal miners will lose revenue.”
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Full-year profit at BHP, slated to report earnings this month, may drop 24 percent to $17.9 billion, according to the average of 20 analyst estimates compiled by Bloomberg. Credit Suisse AG analysts, revising down commodity price forecasts, cut their full-year profit estimate for BHP by 7 percent, according to a July 12 note.
Analysts trimmed 2012 profit estimates for Rio on lower commodity prices and slowing growth. Rio today posted first-half net income of $5.9 billion, beating the $5.04 billion average of 11 estimates compiled by Bloomberg.
Kelly Quirke, a Melbourne-based spokeswoman for BHP Billiton, declined to comment on falling coking coal prices, its impact on the company or plans to cut output, as did Karen Halbert, a spokeswoman for Rio Tinto.
About 44 percent of Alpha Natural Resources Inc.’s revenue last year and more than 10 percent of BHP’s sales in the year ended June 30, 2011, came from coking coal. The fuel made up about 10 percent of Anglo American Plc’s revenue last year.
Should benchmark prices fall below $200 a ton because of receding demand in China, the world’s biggest steel producer and consumer, coking coal suppliers including BHP, Rio Tinto, Teck Resources Ltd. (TCK) and Alpha Natural will start cutting output to support prices, said Kuni Chen, an analyst with CRT Capital Group LLC in Stamford, Connecticut.
While spot prices have fallen below $200 a ton for the first time since August 2010, the drop may not lead to settlements at these levels in the next quarter, according to Doyle Trading Consultants LLC, an energy research firm specializing in coal.
“When there are major volume commitments at stake, negotiations are much different than spot market transactions during periods of very weak demand,” Doyle Trading said in a July 26 report.
Global steel demand growth is forecast to slow to 3.6 percent this year from 5.6 percent in 2011, according to the World Steel Association. China may consume 648 million tons of steel this year, compared with 657 million tons forecast in March, because of the slowing economy, Australia’s Bureau of Resources and Energy Economics said in a June 27 report.
“To buy or not buy coking coal now is a million dollar question, which doesn’t have an easy answer,” said Jayant Acharya, director at JSW Steel Ltd. (JSTL), India’s third-largest producer. “The industry is in a wait-and-watch mode. Prices look weak and may fall further.”
Chinese steelmakers may lower production this month and next to remain profitable as the slowest economic growth in three years drags down sales. Immediate-delivery prices of benchmark hot-rolled steel sheets in China fell to 3,652 yuan a ton on Aug. 7, the lowest level since November 2009.
“Steel prices in China are falling faster than raw material prices, which can lead to closures of some of the high- cost capacities,” said Mark Pervan, the head of commodity research at ANZ Banking Group in Melbourne.
The slow pick-up in demand in Japan, the biggest coking coal importer, has further dashed the hopes of miners. Japan’s crude steel production in the first six months of this year was little changed from a year earlier at 54 million tons, belying expectations demand will spurt as Asia’s second-biggest economy rebuilds itself after the Fukushima nuclear disaster last year.
Contract coking coal prices surged to a record $330 a ton in the June quarter last year, after heavy rains in Queensland disrupted output at mines and choked shipments. Prices declined for four straight quarters after that before climbing back in the three months started July 1.
As much as 87 percent of the 275 million tons of global seaborne coking coal trade is distributed among Australia, the U.S. and Canada, according to David Radclyffe, managing director for equity research at Nomura Holdings Inc. in London, giving suppliers a hold on prices. Australia supplies 57 percent of the market, he said.
Mongolia is likely to provide the strongest new competition being next to China and because of the size and quality of its reserves, Australia’s Bureau of Resources and Energy Economics said in a July 2 report. Coal mill in cement plant india
“China benefits from its proximity and availability of cheaper coal from Mongolia,” said Helen Lau, a Hong Kong-based analyst with UOB-Kay Hian Ltd. “Mongolia will continue to replace Australian coking coal in China.”
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