Australian coal miners will get a boost from Indian steelmakers seeking to reduce emissions by using more efficient, high-energy coking coal from Down Under.

Australia's resource and energy export revenue is forecast to hit a record A$464 billion in fiscal 2023, A$5 billion higher than the government forecast in December, due to an anticipated lift in metallurgical coal and iron ore earnings and a weaker-than-expected exchange rate against the US dollar.

After both metallurgical and thermal coal prices rode the surge in energy prices in 2022 stemming from Russia's invasion of Ukraine, the Australian government sees its metallurgical coal exports rising to 172 million metric tons by fiscal 2028 from 163 MMt in fiscal 2022.

Most of the volume will go to India, despite China having restarted coal purchases from Australia again in February after unofficially banning such imports in October 2020.

'Decades of strong margins'

Australian producers would prefer a long-term offtake contract with a steelmaker in India over one in China, which stopped trading with them during the unofficial ban period, Lloyd Hain, managing director of AME Research, said in an interview.

"There will still be a market for low-sulfur, high-quality premium coking coal from Australia in China given [the latter's] blast furnaces are designed around that, but it's tough for us to see how exports [to China] could sustainably go back to what they were before the ban," Vivek Dhar, mining and energy commodities research director at the Commonwealth Bank of Australia, said in an interview.

India became a bigger importer of Australian coking coal than China in 2018, according to S&P Global Commodity Insights data, and Australian producers see that trend strengthening.

Coronado Global Resources Inc. CFO Gerhard Ziems told a Feb. 22 analyst call that global seaborne coking coal demand is expected to rise 43% by 2050, driven by India's planned blast furnace steel production.

BHP sees India's steelmaking sector underpinning "decades of strong margins" for its coking coal assets in Australia. The miner said that while ex-China steelmakers would remain under pressure "as the general industrial climate softens," India in the leadup to its 2024 general election could buck the trend.

Net-zero drive

As the world's second-largest steelmaker after China, India's efforts to reach net-zero will rely heavily on decarbonizing that sector, according to The Climate Group, which launched the SteelZero demand initiative by steel users in India in July 2022.

"Different coals emit different amounts of carbon dioxide in relation to the energy they produce when utilized. Australian and US metallurgical coals in general tend to be of a higher quality [more efficient, less carbon intensive] than the coal produced by competitor locations," Ziems said in an email interview. "Coronado is well positioned to support Indian steel demand growth well into the future."

Metallurgical coal is also a critical material in the generation of renewable energy infrastructure such as wind turbines, solar, hydro, nuclear power infrastructure and electric vehicles, according to Ziems.

Though India's government is initially targeting green hydrogen and carbon capture, utilization and storage to meet these goals, these technologies are still decades away, according to Pranay Shukla, director of research and analysis of dry bulk commodities and shipping at S&P Global Commodity Insights.

Using Australia's high-quality coking coal also means less coke needed per metric ton of steel, enabling steelmakers to maximize their use of renewable energy as their power source, Hain noted.

Competition for supply

With India already receiving more Australian coking coal than any other destination, the next biggest competitor for meeting India's needs is the US, which has only exported 6.3 MMt to the subcontinent over the past four quarters, compared with 49.8 MMt from Australia, according to Commodity Insights data.

A free trade agreement between Australia and India that came into force in December 2022 will ensure Australian coking coal is preferred over the US because it incurs no duties, while the US will be supplying a European market weaning itself off Russian energy sources, Shukla said.

Coal accounts for 74% of Australia's overall exports to India, of which 71.4% is coking coal, according to India's government.

Australia's government sees US coking coal production "losing steam" in 2023 after having risen by about 2 MMt to 43 MMt in 2022, before bouncing back to 45 MMt by 2028, while Canada's exports should lift as CST Group Ltd.'s Grande Cache mine in Alberta restarts and remain robust at around 29 MMt in 2023 and 2024.

Russian exporters meanwhile face a tough outlook given the impact of Western sanctions, while Mozambique's exports were expected to surge in percentage terms to around 7 MMt by 2028 from 4 MMt in 2021.

Despite this supply growth elsewhere, Mozambique's coking coal has quality issues whereas transport logistics for North American production mean its high-quality coal is far more costly, further strengthening the likelihood of India preferring Australian product, Hain said.

"It's a combination of quality and location, which is why we're in the box seat to benefit from India looking to lower the carbon intensity of its steel industry by using existing technology," Hain said. AME sees India's blast furnace production adding another 60 MMt of capacity by 2030.

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