(EnergyAsia, November 1 2011, Tuesday) — Energy consultant Wood Mackenzie expects metallurgical coal prices dropping from the current quarterly price of US$285/tonne for premium hard coking coal to under US$240/tonne a year from now.

Still, it said this price remains significantly above the marginal cost of production, and the product remains strongly demanded among Asian consumers.

Prakash Sharma, the company’s coal market analyst, said:

“Prices have started to fall from the last quarter and will continue to decline due to softening demand and the recovery of supply from flood-hit basins earlier in the year. The weakening demand is largely attributed to the global macroeconomic slowdown which appears to have accelerated through the summer in much of the developed world. Leading industrial indicators suggest a sharp deterioration in manufacturing activity – reflected by the decline in global steel production.”

Wood Mackenzie’s senior economist, Ed Rawle said:

“The global economy has entered a period of extreme uncertainty. Wood Mackenzie’s global GDP growth forecast has been revised down from 3.1% to 2.8% in 2011, and 3.7% to 3.6% in 2012. But there are significant downside risks to this outlook.

“The Eurozone debt crisis remains unresolved and threatens to trigger a European banking crisis. Due to the sheer scale of the European banking sector, this is of major concern since it would likely lead to a global banking crisis with implications for us all.”

Despite near-term downward price movements, Wood Mackenzie says that several factors have the potential to turn this trend.

Firstly, some mines have not fully recovered from the floods in Australia’s Queensland state early this year. Wood Mackenzie expects the approaching wet season to delays some mines resuming full production levels.

Secondly, persistent worker-strikes at BHP Billiton Mitsubishi Alliance operated mines have the ability to tighten the market as these operations produce 26% of globally traded metallurgical coal.

Lastly, US low-volatility supply has been curtailed by mine outages and changes in blending techniques following various mergers.

In the long-term, Wood Mackenzie predicts coking coal prices will remain strong on account of supply constraints, continuing the trend for merger and acquisition (M&A) activities since early 2008.

Mr Sharma said: “Demand growth will be led by emerging markets with Asia accounting for 75% of global metallurgical coal demand by 2030. China and India will be key demand drivers, contributing to 60% of Asia Pacific’s total import demand.”

Mr Rawle said: “The bright spot amidst the uncertainty continues to be the developing world. Specifically, we see China and much of Asia powering ahead, drawing on growth drivers that have been deliberately de-coupled from troubled developed economies over the past couple of years.”

Wood Mackenzie expects China’s reliance on coking coal imports to increase to make up for insufficient domestic supply of high quality coking coal.

China’s plans to close down furnaces of less than 1,000 cubic metres in capacity, and installing new blast furnaces with capacities in excess of 2,000 cubic metres will boost coking coal demand as the larger plants operate on coke produced from high-quality coking coal.

Wood Mackenzie said China will have to turn to suppliers in Australia, Mongolia and, to a lesser extent, Mozambique.

In the year ahead, the company expects downside price risks from the uncertain global environment and the start-up of new mines.

However, this risk will be offset by the constant threat of unpredictable mine outages and the upcoming rainy season in key supply areas.