Global bulk coal, iron ore strain rail capacity: Deutsche Bank
The shift transforming the bulk coal and iron ore commodity markets from regional to global in nature is straining infrastructure -- especially in emerging economies -- and particularly for rail, according to a report issued late last week by Deutsche Bank's metals and mining analysts. "While these commodities are abundant, methods for getting them to market are not," said DB. "Winners and losers will be determined not just by total delivered cost and quality," DB said, "but more by infrastructure capacity and constraints."
In their 90-page study, the DB analysts see the most promising coking coal export growth over the next two to three years coming from Russia (+83% potential); Australia (+38%), and Canada (+31%). These "are the regions that look likely to have the largest incremental change," DB said. "The largest iron ore export growth potential is from Canada (+100%) and Brazil (+37%), but we only forecast the natural European market for these two to increase by 12 [million] mt over the next three years," it said, "leaving South Africa and Australian suppliers wit their proximity to the largest demand market (China) as likely beneficiaries." The analysts explained that the initial surge in demand for coking coal and iron ore was met by latent global capacity at existing mines, rails and ports. "The previous pricing peak in 2007 was achieved when the global ship capacity became a bottleneck (bulk freight rates increased five-fold in a two-year period)," DB noted.
The study emphasizes that "freight capacity is not an issue now with the largely private market efficiently correcting." DB said 294 Capesize vessels were completed in the last 30 months, a 37% increase and noted the current Capesize order book for the next 2.5 years is for 589 vessels. "Rail capacity (to get the product to port) is likely to be the clear bottleneck to supply in all regions of the globe," DB said. The analysts identified key rail bottlenecks as "1) Queensland [Australia] coal rail development; 2) China 3rd rail development 3) South African coal rail, and 4) an aging Russian network." The DB analysts are also expecting producers to achieve higher average prices through two mechanisms. "We would expect steady-state benchmark and spot-based pricing to ultimately be the same; however during periods of shortage and price spikes, spot-based pricing should enable the miners to get better advantage from the rises."
Secondly, "increased access to the international market is likely to enable producers to more readily achieve international price parity (or at least closer to it) on domestic product," they added. New supply markets are also seen opening. "Higher achieved prices offer the potential for a number of supply basins to supply more readily into the global market," DB wrote. "The US, Russia and Central Europe are potential examples of this."