Australian steel prices to stay elevated

Did you know that the price of Australian Premium Coking Coal has more than halved in the past 5 months?

The chart below shows it now reaching Oversold levels (on a weekly basis) and it has mean reverted to its 200 week moving average.

For the buyers of this coal (steel companies), this is good news. Their input prices are cheaper.

When you combine that with the price of shipping (as per the Baltic Dry Index) and Iron ore have both fallen 60% in the past 3 months…..then these cheaper ‘inputs’ bode well for steel producers.

However, the lower price being achieved for coking coal is carrying weight in the decisions of mining companies such as Australian headquartered, South 32, who has decided against proceeding spending $700 million to extend and expand the life at an existing metallurgical coal mine in New South Wales.

https://www.bloomberg.com/news/articles/2022-08-22/south32-abandons-plans-for-australian-metallurgical-coal-mine?sref=qLOW1ygh

This follows its January 2021 decision to not develop a project in Queensland. It is now looking for a buyer of its 50% interest.

In both cases, South32 cited the allocation of capital didn’t support an adequate return nor making the projects financially viable.

Instead, they are opting to focus on North American projects, which is a ‘friendlier’ jurisdiction.

Beyond the ESG and political landscape, I also speculate the greatest risk comes from how the projects would be financed.

Furthermore, combine less supply of coking coal for local steel manufacturers, Australian tariffs on steel imports, China’s tariffs on its steel exports and a tight labour market…….domestic Australian steel prices aren’t about to decline anytime soon.

August 24, 2022

by Rob Zdravevski

rob@karriasset.com.au

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