US coal industry pins hopes on China's stimulus

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

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.

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