SOMETHING does not quite add up with China’s rising steel production, but falling coal output and imports so far this year.
China’s raw steel output was 480.76-million tonnes in the first seven months of this year, up 2.7% from the same period a year earlier, according to data from the National Bureau of Statistics.
However, imports of metallurgical, or coking, coal used to make steel were down 12.6% to 36.01-million tonnes in the first seven months of the year, according to customs data.
Given that imports only meet roughly 10% of China’s coking coal needs, it is essential to look at domestic coal output.
Total coal production in China in the first seven months of the year was 2.163-billion tonnes, a decline of 1.45% on the same period last year, with last month’s output down 1.63% from the same month last year, according to data from the China Coal Transport and Distribution Association.
What is not clear is the breakdown of thermal to coking coal within those broader production figures. This means that while overall coal output is lower this year, it may be that coking coal’s share of this has risen relative to thermal coal, which would offer an explanation for the mismatch between rising steel output and lower domestic coal output and imports.
However, a closer examination of the data shows coking coal output would have to have made major gains to account for the discrepancy. To produce the 480.76-million tonnes of steel would take about 370.2-million tonnes of coking coal, using the World Coal Association’s average of 770kg of coking coal to one tonne of steel.
Taking away imports of 36.01-million tonnes, this means that domestic coking coal would have to have supplied about 334.2-million tonnes to the steel sector.
China has for the past two years produced coking coal to thermal coal at a ratio of close to 1 to 7.
If this ratio is applied to the 334.2-million tonnes of coking coal the steel industry would have needed from domestic sources in the first seven months of the year, it would suggest total coal output of 2.339-billion tonnes. This is 176-million tonnes more than has been reported, implying that the ratio of coking coal to thermal coal has dropped to around 1 to 6.5.
It is possible this is indeed the case, given the additional coking coal mine capacity that has been added in Shanxi province, the top domestic supplier.
A Standard Chartered report from April last year estimated that 111-million tonnes of coking coal capacity would be added to Shanxi mines in the three years from last year to next year, with the bulk coming in the first two years.
The only other plausible explanation is that coking coal demand has been partially met from reducing stockpiles.
Greater efficiencies at steel plants is also a possibility, but this would likely have made only a marginal difference to consumption of coking coal.
What is most likely is that the additional coking coal demand has been met from domestic sources, despite seaborne prices falling to their lowest level in seven years.
The question then becomes as to whether Chinese coking coal miners can continue to increase output, or whether they are being subject to the same profitability issues suffered by their global counterparts. Estimates from analysts vary, but the consensus is that at least 30% of global coking coal production is loss-making at the present Asian spot price of about $113 a tonne.
This may rise to as much as 50% if the cost of sustaining capital is added in, and miners are starting to respond by idling output, particularly in North America.
Canada and the US have been the second-and third-ranked coking coal exporters behind Australia, with those three countries accounting for about 90% of global seaborne trade in recent years.
About 70% of Chinese coal mining firms are making losses, according to the China Coal Industry Association. It suggests Chinese miners are worse-off than their global counterparts, and are thus unlikely to be able to raise output under the pricing scenario.
If steel output continues to grow, it becomes likely that coking coal demand will have to be met by imports, with the weak prices a further incentive for steel mills to source from overseas.
Reuters
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