June 19, 2019 - Investors have become quite bearish on the seaborne metallurgical coal market, driven by concerns over a global economic slowdown and its possible impact on steel demand, analysts from Seaport Global wrote Tuesday.

Factors of Concern

Chinese blast furnace profitability has weakened to a five-month low as of Monday as steel prices have fallen and iron ore prices have risen, "crimping steel margins," Mark Levin, senior analyst, and Nathan Martin, senior associate analyst, said.

With Chinese steel prices as the "best real-time indicator of market sentiment," the analysts wrote, it is worrisome that steel prices have yet to come above their key raw material ingredients, particularly when "China remains the epicenter of the coking coal world."

"With China's seasonally weak steel production season upon us and concerns about the sustainability of the country's economic growth given rising trade tensions, there are fears that recent government stimuli won't be enough to stem the tide of weakening steel prices," Levin and Martin said.

In addition, China came off a record steel production month in May and the analysts have annualized a record 979 million mt in production, possibly creating an over-supply situation.

Europe, too, is an area of concern for the met market following two recent production cuts from ArcelorMittal, the leading EU steel producer, in addition to weakening steel prices on the continent.

"Yes, India is the future, but Europe is where most U.S. met coal exports go now," Levin and Martin said, noting 44% of U.S exports into Europe, compared with 9% to India and 18% to Asia.

Positive Effects on Demand

On a more optimistic note "it still makes a lot more economic sense for Chinese me coal customers to import coking coal rather than to source it domestically," Levin and Martin wrote, noting that it is $21/mt cheaper to import than buy domestic.

India, too, is a source of optimism as a consistent buyer, importing about 90% of its coking coal.

"With its steel production capacity likely to expand materially the next five years, India seems poised to pick up any slack should the Chinese retrench," the analysts noted.

In Australia, the analysts noted many of the logistical and mine-related issues from last year have been fixed, with improved rail service and declining vessel queues.

Coke exports from the country are up 2% year on year to 57 million mt through April, and "many of our industry contacts expect the export numbers to get better as the year rolls along," the analysts wrote.

In the U.S., Levin and Martin project a 4% decline year over year in met exports in 2019, and wrote "getting coal out of the ground, as well as attracting outside capital, remain as difficult as ever," adding that they "think this dynamic remains a structural positive for the met market."