November 28, 2017, 01:15 / Business Exclusively by subscription

Coal prices resumed rapid growth

Slower-than-expected shutdowns in China triggered coal shortage Polina Trifonova Chinese industry realized that they would need more ore and coal than they had planned / David Goldman / AP

Prices for coking coal have increased by 17.6% since the beginning of November, exceeding $200/t (at the beginning of the month, according to ACRA, a ton of coal cost $170). According to Metals & Mining Intelligence, the last time a ton of coking coal cost more than $200 was in July 2012 (see chart). Iron ore prices are also gradually winning back the fall - in November the cost of a ton reached $68, and the growth continues.

Prices were supported by news from China. Steel capacity utilization in China decreased from 76% in September to 64%, BCS analysts cite Reuters data. And capacity utilization in Hebei, China's largest steel province, fell from 77% to 52%. Official confirmation of these data may appear in mid-December with the publication of statistical data. Such a decrease is a record low, BCS analysts emphasize. But expectations associated with China’s environmental program to reduce harmful emissions from industrial production were higher, so there was a shortage of metallurgical coal and iron ore on the market, says ACRA analyst Maxim Khudalov. China produces almost half of all steel in the world: of the 1.7 billion tons of steel produced in 2016, 843.2 million tons came from China. Chinese industry realized that they would need more ore and coal than they had planned. According to Khudalov’s estimates, the deficit of coking coal is now about 4 million tons. At the same time, the restructuring of the metallurgical and coal industries continues in China - inefficient and uncompetitive production is being closed.

So such jumps in prices for raw materials are natural, Khudalov believes. In his opinion, this is not a long-term trend, but only a coincidence of several market factors, but it plays into the hands of the largest Russian producers of coking coal - Mechel and Evraz (their representatives did not answer questions). Thus, Evraz has risen in price by 3.15% on the London Stock Exchange since the beginning of November, but Mechel on the New York Stock Exchange fell by 3.9%.

The rally in the metallurgical raw materials market has already supported the companies. In the first half of the year, Mechel produced 10.3 million tons of coal, 10% less than a year earlier, according to the company’s materials. At the same time, EBITDA of the company’s mining segment increased by 139%: from 14.4 billion to 34.6 billion rubles. due to rising prices for raw materials. From Metals & Mining Intelligence data it follows that from June 2016 to June 2017, the price of coking coal increased by 63.3%: from $90 to $147 per ton. In total, the mining segment accounted for 82.9% of the EBITDA structure of the entire Mechel in the first half of 2017 (RUB 41.7 billion).

In the first half of the year, Evraz produced 11.5 million tons of coking coal, according to company data. The mining segment accounted for 57.2% ($659 million) in the company's EBITDA structure. Evraz's total EBITDA for the first half of the year is $1.15 billion. Compared to the first half of 2016, the performance of the company's mining segment has increased significantly. Coal production accounted for 37.4% of total EBITDA ($216 million).

The rise in prices for raw materials and Severstal helps, Credit Suisse analysts write in a report. Despite a decrease in sales of coking coal concentrate by 92% to 68,950 tons for nine months (excluding intragroup sales) and a decrease in sales of iron ore raw materials by 3% to 4.4 million tons, EBITDA of the Severstal-Resource division increased 2.4 times – up to $607 million. The division accounted for 33% of the company’s total EBITDA.