From Westpac’s excellent Justin Smirk:

Coal prices tumbled in April, iron ore was more stable while base metals firmed a little

Coal prices have been falling rapidly with the latest spot Qld met coal prices down –39% in the last three months and Newcastle thermal down –21%. As a result we have lowered our near, and medium, term forecasts for both met and thermal coal. For end June Qld met is now US$90/t (from US$120/t) and Newcastle thermal is now US$52/t (from US$70/t). For end December 2020 Qld met has been revised to US$100/t (was US$141/t) and Newcastle thermal is now US$52/t (was US$65/t). Through April crude oil inventories were nearing capacity and on the day of the April West Texas contract expiry no one wanted to hold it as there was nowhere to store the oil if you took delivery. This sent the contract negative for the first time; April 20, –US$38/bbl. But this was just a one–day event and spot prices remained positive. Nevertheless, this event highlights the degree of imbalance in the market and we have lowered our end June forecast to US$25/bbl and end December to US$30/bbl (they were US$30/bbl and US$32/bbl respectively). The price for Australian LNG landed in Japan has been following energy prices south and our end June forecast has been revised to US$4.2/mmbtu (from US$6.8/mmbtu) and end December is US$2.4/mmbtu (from US$4.1/mmbtu).

There has been a partial offset from firmer gold and base metals. The Westpac Base Metals Index end June forecast has been lifted to 126 (from 119) but the end December forecast remains unchanged at 120. Gold firmed through April and we have revised up our end June forecast to US$1,700/oz from US$1,640/oz. Iron ore prices remain well supported and they remain unchanged at US$80/t at end June and US$65/t end December.

Both supply and demand have been a negative for coal

Coal prices have been hit by a combination of soft demand and recovering supply, particularly from Australia. The COVID shutdown has hit power demand globally but as economies start to reopen, power demand has been volatile. Japanese demand is now up slightly in the year in stark contrast to India and Malaysia where demand is still down over –20%. Chinese power demand remains in a funk and is down –8% in the year while South Korean demand is down –8%yr. Meanwhile, European demand is down –16%yr and globally, thermal coal stockpiles remain elevated and need to be wound down before demand for coal can improve.

Thermal coal prices have fallen to the 75th percentile of the cost curve suggesting miners will now start feeling significant pain and you would expect output to adjust meaningfully should prices not lift soon. Falling domestic coal prices and robust imports holding down seaborne prices increases the prospect Chinese government intervention and stricter import controls will be invoked earlier this year than occurred last year. A few vessels struggled to get customs clearance at Jingtang recently and were forced to wait for more than 3 weeks. The situation at Caofeidian is even worse, with 8–9 vessels carrying coal waiting to discharge. While such actions may support Chinese domestic coal prices they will further suppress seaborne coal prices.

For met coal and iron ore demand, steel demand has been disrupted which has seen rising steel inventories and reductions in steel production. In Europe and the US, automakers are resuming production, but only in limited operations with low production volumes. Despite plans to re–open some steel mills in late April/early May, few facilities have yet done so and there have been further capacity cuts in the US. Chinese blast furnace and electric arc furnace (EAF) utilisation rates are both rising but the focus of the cutbacks, and so the recovery, has been more in EAF output. Through the first few months of 2020 there was a much greater than usual surge in Chinese steel inventories, to March inventories surged 50% in the year, and while they are starting to be run down they remain at a very high level.

This surge in inventories came as Chinese steel product sale fell 6% in the year to March, the largest fall in sales since January 2016. This oversupplied situation in the Chinese steel market remains a drag on steel prices which are down 12% so far this year.

Chinese steel production, both pig iron and crude steel products, are flat in the year to March. This year the usual post Luna New Year recovery in steel production was delayed, and the pace of recovery has been slower than usual. Westpac is forecasting a 2% fall in crude steel production this year, following on from an 8% rise in 2018 and 2019.

Iron ore prices supported by weak supply and more robust demand

Helping support seaborne iron ore prices through the first quarter of 2020 was that iron ore imports were been flat in the year to March. Imports from Brazil were down 23% in the year to March while Australian ore was up just 2% (the gap being filled by South Africa and Russia). But seaborne iron ore supply has strengthen and Westpac’s latest “Australian Bulk Exports” report highlighting Australian iron ore exports gained 9% in the year to April with Brazilian iron ore exports for April setting a 3 month high of 23mt. Combined, exports from Brazil and Australia would be at 99mt, above the 8 month average of 97mt. Chinese imports of ore surged thought April lifting 11% in the month to be up 18% in the year and that is before the flood of exports from Australian and Brazil reach the Chinese market. As Chinese steel production lifts modestly through 2020 it will be the further gains in iron ore imports that will put downward pressure on iron ore prices.

As noted above, EAF were the focus of the cutbacks in Chinese steel production during the LNY and COVID shutdown and now are driving the recovery. This matters for the iron ore market as EAFs use more scrap steel and tend to draw more on domestic ore than imported ore. As such, the shutdown of EAFs did not have much of an impact on the demand for imported ore but did have a significant impact on the demand for scrap steel and thus the price of scrap steel. Chinese scrap steel prices fell 12% (in US$) from late January early April. Since then, as EAF utilisation rates have lifted, and EAF steel output has increases, iron ore prices have gained 5%. EAF production also matters for met coal too in that they use PCI coal and not the high grade met coals. As such, the reduction and recovery in EAF production has almost no impact on the demand for, and thus price of, premium seaborne met coals.