The Metallurgical Coal Market
Cobalt Coal Corp produces high grade metallurgical coal used in the production of steel. The global steel market is strengthening as the world begins to pull itself out of the worst recession since the Great Depression in the 1930’s. This economic recovery has fueled steel demand (and thus demand for metallurgical coal), and the price of metallurgical coal has strengthened significantly since the beginning of 2009.
Steel production is increasing dramatically in the world’s developing countries, specifically, China and India. With over one third of the world’s population, these two countries are now modernizing their economies and are increasing the standard of living of their people. This means a sharp rise in demand for durable goods and infrastructure (cars, appliances, rail way lines, bridges, roads, power plants, manufacturing complexes, distribution systems) and thus, a sharp rise in steel demand. The graphs charts below show China and India’s recent and expected steel production.
Source for the above: Commonwealth Coal Services Inc.
The above graph shows US Metallurgical (Coking) Coal prices from the year 2000, up until November, 2009. The large price spike in 2008, was caused by increasing steel production world wide, but specifically, increasing steel production by China and India. The rapid collapse of metallurgical coal prices seen above between late 2008 and early 2009 was due to the onset of the global recession and the consequent drop in steel production, and thus metallurgical coal demand.
The large price spike shows the inelasticity of supply with respect to demand; in other words, there is no large scale, short term supply increase that can be put on the market quickly in order to balance supply and demand. Articles reflecting the supply issues, and the enormous amount of capital required to remedy such supply issues can be found here and here .
With steel production increasing, metallurgical coal is expected to rise in price, given the supply constraints detailed above. Goldmann Sachs recently upgraded their view of metallurgical coal producers saying:
"We have greater conviction that, if Asia becomes supply constrained (as we expect in 2010), U.S. coal producers will receive Asia spot prices at U.S. ports," - Source
Wellington, New Zealand based brokerage house McDouall Stuart recently stated its expectations for metallurgical coal prices to rise to US $200 per ton in 2010/2011 and also made the following statement on November 26th, 2009:
"Global coal markets are rapidly returning to reflect their underlying fundamentals, and those fundamentals point to an increasingly severe mismatch in global supply and demand, particularly for metallurgical coal," McDouall Stuart says.
With China and India forecast to grow by 8.5% and 5.4% respectively in 2009, "there appears little now to stop a recovering global economy from steadily working its way back towards the tightness seen during 2007/08". - Source
Cobalt is very confident in the continued strength of the global steel market, and sees a strong, healthy future for metallurgical coal producers.
