Iron ore and metallurgical coal are treated as two sister commodities in the steel industry as both are necessities. Back in January, Jeremy from Brean Murray Carret & Co. pointed out the strong demand of metallurgical coal from China will push the price much higher than expected in 2010.
Well, recently Japan agreed to a 40% jump in iron ore price in a negotiation with BHP Billiton (NYSE:BHP), and it is widely expected that the metallurgical coal price will see a 55% jump in 2010 to $200/ton from $129/ton in 2009. Chinese steel makers are rushing to secure the 2010 metallurgical coal supply according to the latest Chinese news. Goldman Sachs also came out predicting fundamental improvement in metallurgical coal demand and upgraded coal names such as Alpha Natural Resource (ANR), Arch Coal (ACI), Massey (NYSE:MEE), and Patriot Coal (PCX).
The reason behind the strong demand from China is that there are no high quality domestic metallurgical coal producers in China and the quality of the coking coal is critical to producing high quality steel. China's ambition to build the nation's high speed railway network will put a high base for metallurgical demand from overseas. A major exporter like Alpha Natural is seeing tremendous demand from China and other Asian countries. It is estimated that China alone will demand well over 100 million tons met coal annually. The list below illustrates the expected shipment of met coal for major US coal producers (based on recent management 2010 guidance).
- Alpha Natural: 12-13 Million tons
- Massey: 10-12 Million tons
- Arch Coal: 8-10 Million tons
Disclosure: Long BHP, ANR, MEE, ACI