Commodities Comment:More cuts announced, but just how oversupplied is the met coal market?

Met coal supply cuts keep rolling. Over the past two weeks curtailments havebeen announced by Teck (Canada), Solid Energy (New Zealand) andGlencore (Australia), and now Peabody has followed, announcing it will cutproduction at its North Goonyella mine in Queensland. On top of this we haveseen a number of US shutdowns (by ANR, Murray, Rhino), which are thermalcoal-focused with potentially some met coal impact.

    The met coal announcements all reflect the steep decline in prices this year,with spot premium HCC down 21% YTD to ~$88/t FOB Australia. When Teckmade its announcement, its CEO stated that the seaborne industry needed tocut 45mt of production to move back into balance, while industry consultantWood Mackenzie estimates HCC oversupply of 27mt. We agree more with theformer than the latter and will outline in this piece how we think about met coaloversupply. We expect more cuts to materialise over the next few months andthink pressure will build further once the 3Q15 contract almost inevitablysettles much lower QoQ (we expect $95/t in 3Q versus $109.50/t in 2Q, basisFOB Australia).