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US coal industry pins hopes on China's stimulus

Updated: 2012-10-19 09:52
By Joseph Boris and Yu Wei in New York ( China Daily)

US producers of coal used in steelmaking have been seeing once-robust exports slow to a trickle, partly due to reduced demand from China.

US coal industry pins hopes on China's stimulus

China's imports of metallurgical, or coking, coal dropped 22 percent in August, to 2.6 million metric tons, from the same month last year, according to the General Administration of Customs. The drop has prompted cutbacks and even closures at some mines in the United States. [Photo/Agencies]

But recent steps to resume big Chinese infrastructure projects may not be enough to reverse that trend, given the limited export role of most US producers and the stiff competition they face at home from natural gas as a power source.

While China's overall coal imports increased almost 5 percent in August, its imports of metallurgical, or coking, coal dropped 22 percent, to 2.6 million metric tons, from the same month last year, according to the General Administration of Customs.

Through the first eight months of 2012, Chinese imports of the chief raw material in steel production totaled 34.1 million metric tons, up 29 percent from the same period in 2011.

China, the world's biggest steel producer, imports nearly 15 percent of the coking coal it uses. In early September, the National Development and Reform Commission announced its approval of an estimated 1 trillion yuan ($157 billion) for 60 infrastructure projects intended to pull the Chinese economy from its slowest growth in three years.

US exporters of coking coal hope the demand for the raw material will be boosted by China's new government stimulus spending on highways, ports and airport runways. The increased demand is likely to come from Chinese steelmakers, electricity generators, and metals and chemical manufacturers, leading to higher prices. It isn't clear, though, if that scenario will materialize or if China's domestic coal supplies will be enough to satisfy the higher demand.

Either way, Chinese buyers of coking coal could find the market changed after months of falling prices have left them scrambling to defer shipments or renegotiate higher-price contracts to save money.

After jumping to a record $330 per metric ton in early 2011, the world price of coking coal recently fell by nearly half to $170 a metric ton.

For coal used for heating fuel, recent increases in the price of competing natural gas could prove to be a boon, as utilities switch back to coal.

Last week, Dahlman Rose & Co forecast that Chinese steelmakers' demand for coking coal appears to be rising. Daniel Scott, an analyst at the company, wrote that margins on the spot market for certain Chinese-made steel products have increased by more than 30 percent since July, and he suggested that this will lead to higher prices of iron ore and coking coal.

The extent to which Chinese demand is revived will be tied largely to the national economy. The National Bureau of Statistics, or NBS, announced on Thursday that China's economy grew 7.4 percent year-on-year in the third quarter of 2012, slower from 7.6 percent in the second quarter and 8.1 percent in the first.

The slowing economy has hit domestic steel producers hard. According to the China Iron and Steel Association, 38 of 81 steelmakers recorded losses through the first seven months of 2012. The losses totaled 16.9 billion yuan, an increase of more than 400 percent from those companies' losses during the same period last year.

"Demand from China is so great that its coal imports affect the global market for coal," said Luke Popovich, a spokesman for the Washington-based National Mining Association, the US industry's chief lobbying group. "Soft demand for metallurgical coal used in steelmaking and for steam coal used to generate electricity will obviously harm US producers."

Last year, metallurgical coal dominated the US industry's exports, at 70 million short tons, compared with 38 million short tons for steam coal, which is used in power generation. The drop in Chinese imports of metallurgical coal has prompted cutbacks and even closures at some mines in Appalachia, the coal-rich region stretching from Pennsylvania to Tennessee.

Virginia-based Alpha Natural Resources Inc, the world's third-biggest provider of coking coal to the steel industry, said in August - the same month China announced its import decline - that it would cut 1,200 jobs, about 9 percent of its work force. Earlier this year, Alpha laid off more than 700 miners and reduced production at more than 20 mines.

"The large volume of Chinese steel production influences global metallurgical coal markets for both the amount produced and the price. Recent reduced global metallurgical coal demand has resulted in lower prices per ton and lower net coal production from most suppliers, including Alpha," company spokesman Rick Nida told China Daily.

But exports to China, he said, are a relatively small part of Alpha's sales because the country tends to import coking coal mostly from coal producers in or close to Asia.

Mike Mellish, an economist at the Energy Information Administration, the US Department of Energy's research arm, said the influence of China on US coal exports shouldn't be overstated.

"Our exports to China during the past couple of years are significant in terms of US coal exports, but not so much in terms of the overall market for US coal producers," Mellish said, pointing out that demand from Europe - the industry's top customer - remains strong.

At Arch Coal Inc, a leading producer and exporter that for years has sold thermal coal in China through a broker, the recent dip in demand is seen as a concern but one that's likely to wane fairly soon. The company remains optimistic about the long-term potential of world markets, spokeswoman Kim Link said.

Arch Coal set an export record for the first half of 2012 and will continue to strengthen and form relationships with international customers while exploring opportunities to boost sales abroad, she said.

The company, based in St Louis, Missouri, is developing the metallurgical-coal Leer Mine in West Virginia that, once up and running in mid-2013, could have China as an important customer.

Contact the writers at josephboris@chinadailyusa.com and yuwei12@chinadailyusa.com

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