Seaborne met coal prices look set to maintain a comfortable margin over production costs for another year despite a weak steel market, with expectations that supply tightness will lend support.
Australian producers have cited weather disruptions and Covid-19 workforce absenteeism throughout 2022 as the reason for the tightening supply. These weather concerns are expected to be another factor squeezing supplies in the first quarter of 2023, with the third consecutive La Niña forecast to end in February.
BHP's production guidance for its BHP Mitsubishi Alliance joint venture stands at 58mn-64mn t in 2022-23, having produced 58.1mn t in 2021-22, and down from 63.92mn t the year before. In August, BHP estimated that its production costs will rise to $90-100/t in the year to 30 June 2023, from $89.64/t in 2021-22. This sits against an average of $365.78/t for the Argus daily assessed fob Australia premium low-volatile hard coking coal index in the 1 January-23 December 2022 period. The producer also singled out the Queensland government's royalty hike as the reason that it withdrew its sustaining capital expenditure guidance for its coking coal operations going forward. Switzerland-based commodities producer and trading firm Glencore in early December abandoned a proposed $2bn Australian dollar ($1.34bn) Valeria thermal and coking coal mine project in Queensland state for the same reason.
In the third quarter of 2022, US coking coal output fell by about 3pc from April-June, but was 1-2pc higher than a year earlier at 14.6mn st short tons, Mine Safety and Health Administration data show, as low demand signs emerged and rail delays and geological conditions held some producers back. The fob equivalent cost for US coking coal producers have averaged $150/t this year, based on recent market surveys, with expectations that continued labour tightness, operational challenges on the railroads and operational expenses such as high diesel prices will add as much as another $15-20/t in 2023. At the mines, production costs have been pegged at $104.86/st by the largest US coking coal producer, Alpha Metallurgical Resources, and $100.27/st for key high-volatile A producer Arch Resources in the third quarter, while Ramaco Resources is anticipating a cost range of $97-$103/st for 2023. The year-to-date average for the Argus high-volatile A and high-volatile B assessments on 23 December are at $348.85/t fob Hampton Roads and $330.67/t fob Hampton Roads, respectively. In addition to having confidence in seaborne sales next year, US coking coal producers have already locked in significant volumes to the US domestic utility market in the form of crossover sales to the thermal market.
Participants in the seaborne coking coal market are anticipating another shift in trade flows next year, with Australia and China agreeing to hold further talks to resolve several trade disputes after a meeting in Beijing on 21 December that coincided with the 50-year anniversary of their modern diplomatic relations. But few expect that this will free up volumes or ease supply tightness in the Atlantic and Asia-Pacific in a meaningful way. Instead, this would be a shift that returns coking coal trade flows to pre-2021 patterns in which Australian coal shipments to China accounted for the majority of imports.
China's potential return to making purchases of Australian coal follows European and Japanese mills shift away from Russian coal with the start of the Russian-Ukraine conflict and, more recently, Europe's ban on Russian coal that started in August. European mills' rush to boost Russian imports has meant that the full effect of this shift will only be felt in full next year. Chinese buyers returning to the Australian coal market would probably be welcomed by the European and Japanese mills that had to compete with Chinese buyers for US coking coal to replace Russian material. But US mining companies are also confident that Chinese buyers have their eye on supply security and look set to retain some of the relationships that have been formed over the past two years. Other destinations such as Indonesia with close to 15mn t of new met coke capacity scheduled to start up next year are also looking to the US as a key supply source next year. This is in addition to Indian buyers that are expected to continue diversifying non-Russian coal purchases despite expectations of strong growth in steel output next year.
But some easing in supplies may emerge, with Russian coal producers appearing to have set their sights on recovery next year as they establish themselves further in new key markets including China, India and Turkey. Russian coal production returned to growth in November after four months of year-on-year declines.
