THE fatal gas explosion at the Liushenyu Coal Mine in China’s Shanxi province last week could see improved demand for Australian and Canadian metallurgical coal, potentially benefiting BHP and Glencore, said Goldman Sachs in a recent report.
At least 82 people were killed and more than 120 injured after an explosion on May 22 at the mine which is situated at the heart of China’s mining industry.
The cause of the disaster is still under investigation, but initial findings indicate that Tongzhou Group, the company operating the privately-owned coal mine, had committed “serious illegal violations”, according to a report by BBC.
Given this background, a prolonged shutdown could affect up to 8% of clean domestic metallurgical coal output on an annualised basis, said the bank’s analyst Matt Greene. This might be offset by the fact shutdowns for safety checks imposed on other mines would most likely be voluntary.
In terms of market balances, monsoon season in India could also lessen demand “which may temper near-term expectations of a deficit emerging in the seaborne market,” said Goldman Sachs.
However, there could be a net benefit for BHP and Glencore. “Across our coverage, Glencore and BHP are positioned favourably if seaborne prices recover as both offer metallurgical coal exposure,” it said. In addition, the majority of Glencore’s production is from its Canadian mines which are not subject to the same royalties as output from Australia, historically a major supplier of the mineral to China.
China has sought to lessen its dependence on Australian supply by importing coals from Mongolia and Russia. In the absence of domestic coal, however, China might have to lean increasingly on Western supply in order to get the optimal blend.
“While the timeline and scope of the safety-related disruptions are unclear, the loss of supply from Shanxi could disrupt the ability for steel mills to blend coal to meet specifications, forcing mills to turn to the seaborne market to secure premium tons, which could benefit Australian and Canadian producers,” said Greene.
