FEATURE: Steel mills switch to low-quality coking coal to cut costs

The recent trend to use lower-quality coking coal to reduce steelmaking production costs is likely to continue due to sluggish demand for finished steel, US analysts and market participants told Steel First.

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The international steel industry has been plagued by overcapacity, low prices, volatile raw material costs and thinning profit margins, resulting in consecutive quarterly net losses for the vast majority of steel producers.

In an attempt to keep their production costs low and to remain competitive in the global market, several producers have shifted from using high-quality to lower-quality coking coal.

“The long-term trend involves a trend towards higher percentages of lower-quality coals, both to help on total costs and to assure enough tonnage to meet demand in the future,” Jim Truman, principal analyst metallurgical coal at Coal Markets Research, told Steel First.

“Nippon Steel & Sumitomo Metals Corp just opened a new set of coke ovens that will use the Scope 21 process, which allows the use of up to 50% low-quality coking coals in the blend,” he said.

“The latest settlement at $145 per tonne for low-volatile benchmark coal between BHP Billiton Mitsubishi Alliance (BMA) and Nippon Steel & Sumitomo Metals will provide some relief on costs to steelmakers. This will put lots of pressure on US coal producers, who have been the swing supplier into the global market,” he added.

In a recent interview with Steel First, Kevin Crutchfield, chairman and ceo of US coal producer Alpha Natural Resources confirmed that he had noticed the move by steel producers to low-quality coking coal to save costs. Alpha sells met coal to producers in the US, Asia and Europe.

High-quality metallurgical coal is known as hard coking coal which is $145 per tonne and low-quality metallurgical coal is known at semi-soft, which is about $105-110 per tonne, Steel First was told.

This could give steelmakers about $35-40 per tonne saving if they use lower-quality met coal.

“If you use more semi-soft, the quality of the coke you get falls. So, usually you can’t use more than 20% semi-soft without some quality issues. That is why the Scope 21 process that lets you go up to 50% is a big deal,” said Truman.

Short-term outlook
A source from a major international flat steel product producer based in the USA, who purchases coking coal for the mill, confirmed the move to lower-quality coal and shorter pricing agreements.

“The coal outlook for the rest of the year is not positive,” he told Steel First. 

International metallurgical coal producers have moved to shorter-term spot pricing as a way to manage volatility, market participants said.

Steel producers have adjusted to uncertain market conditions by using spot pricing to remain competitive when buying raw materials to survive in a market that is oversupplied and depressed.

There has been an industry-wide move away from annual, quarterly and monthly prices to spot pricing, which can sometimes change on an hourly basis thereby adding to volatility, producers told Steel First.

“If you’re a steel mill, you do not want to a pay more than your competitors. You’ll want the lowest possible price for your raw materials. They do not want to get involved in longer-term contracts,” said a US coal analyst.

Ernie Thrasher, ceo and chief marketing officer of Xcoal Energy & Resources said at a IHS McCloskey Coal USA conference in New York on Friday June 21 that he had noticed the shift towards spot prices as a way for customers to manage volatile prices.

He told delegates the use of social media by coking coal traders and steel producers to share pricing deals in China has resulted in sometimes hourly changes in spot coking coal prices. 

Slow recovery
The general consensus among coking coal market participants is that there will be a slow recovery in demand that is unlikely to be seen before the fourth quarter of 2013, which will continue to put pressure on spot prices and the US coal market.

Overcapacity in the steel industry will result in a fall in coking coal exports to Europe and Asia in the fourth quarter of 2013, until there is correction in the steel market, market sources told Steel First.

“We have definitely seen a move for pricing as close to arrival date as possible – [the] same as with iron ore,” said a second market source.

“The outlook certainly doesn’t look bright at this moment, but I believe this is true for most commodities related to the steel industry. We would have to wait and see how it looks once all the pessimism has passed,” he concluded.

In February, analysts predicted more metallurgical coal mine idling, production cuts and closure due to weak export demand from major traditional consumers in Europe and Asia.

In 2012, the US exported 52% of its coking coal to Europe, 28% to Asia, 9% to North America and 8% to South America.