The metallurgical coal market could potentially look forward to the start of a recovery phase in about six months’ time, when some of the production cuts should start to come through in the market and customer stockpiles become depleted, mining and commodities veteran Neil Bristow tells Mining Weekly.

“My anticipation is that, over the next six months, we will see slightly reduced volumes out of Canada and Australia. “I think we’ll see a situation where many of the parties are probably going to do a bit of restocking, because inventories are quite low in the met coal market. “So, we should start to see some improvement by probably late in the first quarter of 2016,” the con- sultant with H&W Worldwide Consulting says.

According to Bristow, when one considers the demand side, it is really a question of how strong China is going to come back to the market and also how strong Indian demand is going to grow.

Bristow stresses that the importance of Chinese demand cannot be overstated. The flexibility of a country such as China could move the market from oversupply to very tight in about three to four months.

“India is looking pretty good, but even rising demand from India won’t compensate for a weakening Chinese economy. “If China were to hypothetically start to import over the next five to six months, one would see a tightening of the market, with a corresponding increase in the price. “If China does not increase imports, the market recovery will take longer,” he points out.

When demand returns, the question will be how quickly shuttered production can come back on line. Cost Cutting With all the cost cutting that has been imple-mented, a lot of prestripping has been delayed and, although there would be additional volumes if the market warranted it, it would take some time for it to come back on line.

“I’ll be blunt with you – the current outlook for metallurgical coal is pretty bleak,” Bristow says.

There are a number of factors that have caused this. One of the factors is the decline in imports of metallurgical coal into China, the world’s largest buyer. However, at the end of last year, Chinese steel mills started buying more volume from the domestic met coal market in China, and that started to hit the import volumes

“We’ve had a couple of bounces in the last month in terms of Chinese imports, but, being one of the key drivers of the seaborne market, China had been importing significantly less,” he explains.

The weaker macroeconomic picture also has its part to play in the decline of the met coal industry. It has generally hurt steel output, which has resulted in weaker met coal demand. Bristow notes that China is still shipping significant volumes of Chinese steel, made from Chinese coke, which are impacting on the international seaborne market.

Meanwhile, stronger production volumes from Australia, the world’s leading met coal producer, mainly owing to the ending of long-running strikes at the world’s largest miner, BHP Billiton, improvements in productivity and cost cuts, have given rise to a situation where global demand has shrunk, while output has increased.

He says that, despite some companies going bust, filing for Chapter 11 reorganisations, and despite several mines being closed or idled, the market has not yet seen a balanced supply-demand position emerges.

“Simply put – it’s an oversupplied market. Going forward, there is a pretty gore scenario for the coal industry. “Prices have also followed downward with the oversupplied market and the lack of Chinese buyers, which had seen premium coal down to about $82/t,” Bristow notes.

From the perspective of major suppliers Australia and Canada (global number three producer), currency devaluations against the US dollar have benefited suppliers, in many cases keeping them alive, despite being on poorer margins.

The Australian dollar has declined to about A$0.70 to the US dollar, when it was at parity not so long ago. “It clearly helped the profitability of these operators, and was boosted by productivity gains – where fewer employees produce more coal – and lower overheads because they’ve cut into corporate expenses, resulting in significant cost reductions.”

This has been mimicked to some degree by Canada, where the currency has also fallen to a low of about C$0.73 to the US dollar, benefiting major players such as Teck Resources, which has also improved productivity.

“This allowed Teck to keep head above water, whereas smaller players such as Anglo American’s Peace River operations and the operations of Walter Energy have been idled,” he stated.