Goldman cuts forecast for 2015 coking coal prices to $116 fob

Goldman Sachs has downgraded its price forecast for premium hard coking coal to $116 per tonne fob Australia for 2015, compared with its previous forecast of $119 per tonne fob.

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The US investment bank also cut its forecast for 2016 to $125 per tonne fob (compared with $135 per tonne fob previously) and that for 2017 to $130 per tonne fob (from $140 per tonne fob), according to a research note published on Friday January 23.

Goldman Sachs estimated that marginal production costs for premium hard coking coal would drop to $130 per tonne by 2018 as mining productivity improves and the displacement of marginal capacity flattens the industry cost curve.

“At the moment, coal prices have undershot relative to marginal costs,” Goldman Sachs said. But it believes prices should revert towards marginal costs in a deflationary environment.

The bank, like other analysts elsewhere, sees India as a bright spot to offset a slowing Chinese market.

“India stands out among other emerging markets both in terms of its population and its steel stock. On a per capita basis, the stock of steel in the Indian economy [at 0.7 tonnes per capita] lags well behind China [at 5.6 tonnes] and developed markets like the USA [at 13 tonnes].

“In other words, India is 25 years behind China in terms of steel consumption, and the long-term demand outlook for steel raw materials is positive,” the report noted.

Goldman Sachs added that Chinese steel consumption has increased to “unsustainable levels” and “is bound to decline eventually”.

On the supply front, US suppliers’ production costs are not falling as rapidly as their competitors’ due to a strong currency and more limited potential for productivity gains.

“The combination of low prices and increasing competition from other supply regions will continue to marginalise US producers,” Goldman said.

The bank expects the market share of US suppliers to come down to the “pre-bull” level of 11% from its 2011 peak of 28% as mine closures continue.

However, “in some cases, corporate restructuring may enable some loss-making mines to resume production once their cost base and balance sheet has been reset”, the report read.

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