Trade review: With coal prices hit at an all time high … what’s next?

This report is part of the S&P Global Platts Metals Trade Review series, where we browse datasets and digest some of the top trends in iron ore, alumina, steel and scrap and metallurgical coal. We’re also exploring what the next few months might bring, from supply and demand shifts, to new arbitrages and fluctuations in quality spreads.

The market for metallurgical coal transported by sea enters the fourth quarter with prices at a record level against a backdrop of tightening global supply and healthy spot demand.

However, as participants anticipate prices could correct lower in the fourth quarter with the slowdown in steel consumption in China and the possibility of an increase in supply for all grades, they expect usually that a rapid tightening of supply prevents a sharp drop in the short term.

It comes after benchmark low-volatility hard coking coal prices jumped 100.3% quarter-on-quarter to $ 388.50 / t FOB Australia at the end of the third quarter, while PLV CFR China rose 95%. , 4% over the same period at $ 603.75 / mt.

The tightening of global supply intensified in the third quarter, which was reflected in the drop in spot cargoes observed. S&P Global Platts saw 4.8 million mt of spot transactions for premium hard coking coal transported by sea in the third quarter, down from 5.3 million mt in the second quarter and sharply down from 6.2 million of tm in the third quarter of 2020.

Platts’ analysis of laycans for one-off cargoes of hard coking coal traded shows a sharp drop in volume observed for cargoes loaded in both Q3 and Q4. Based on Platts data, a total of 57 spot transactions for cargoes loaded in the third quarter were observed, compared to 93 transactions reported for the third quarter of 2020. For the loads in the fourth quarter, only 22 cargoes were reported to To date, down 60% from 56 transactions reported in 2020. The analysis considers spot transactions observed for PHCC and HCC, FOB Australia and CFR China, combined.

Market participants are currently highlighting the imbalance between demand and supply, claiming that supply has not been able to keep up with global end-user demand, especially outside of China. According to the World Steel Association, crude steel production outside China grew 18.1% year-on-year between January and August, outpacing China’s growth of 5.3% in the same period. .

“Negative arbitrage” does not mean no import

The price arbitrage between Chinese domestic equipment and POS equipment transported by sea fell to minus $ 33.55 / mt at the end of September, with domestic equipment being the cheapest option. However, some Chinese factories continued to reserve import cargoes amid a persistent shortage of domestic availability. Platts observed a total of 670,000 mt of low volume PHCC and HCC transactions concluded on a CFR China basis for September.

Market players attribute spot import demand amid negative trade-off to the higher cost of inland freight for some factories and specific quality preferences for blending needs. Some factories in southern China can expect to pay 200-300 yuan / t more for delivery than factories in the Tangshan area, for example. Some factories have also said they intend to continue importing materials that are low in sulfur and ash to help stabilize their blend.

Persistent supply tension in China’s domestic coking coal market led to an unprecedented rise in domestic coal prices in the third quarter. Platts valued national coking coal prices up 82.7% quarter-on-quarter from $ 307.24 / t to $ 561.45 / t, as local government safety inspections and environmental regulations have reduced national production. Import prices were supported over the same period by strong end-user resupply demand, with maritime POS prices jumping 95.4% quarter on quarter.

Power Crunch Adds to Fourth Quarter Uncertainty

Significantly higher world prices in the third quarter for energy-related commodities, including coal, could throw a wild card in the market for the fourth quarter. Participants predict that the price differential between hard coking coal and PCI / semi-soft coking coal on a FOB Australia basis will narrow in the near term, as higher thermal coal prices support lower grade coals. .

Power rationing in China has also negatively affected steel production and the demand for raw materials. According to data from Platts, Hebei Province seeks to reduce its 2021 crude steel production from 21.7 million tonnes per year to 228.07 million tonnes. Jiangsu, which has imposed electricity rationing on industrial users, has had the biggest impact on crude steel production, with production falling by at least 50,000 t / day since mid-September. Jiangsu is the second largest steel province in China after Hebei.

Fall in Chinese imports, diversification

With China’s unofficial import ban on Australian coal continuing, its total import volume fell 41.6 percent year-on-year to 30.7 million tonnes between January and August, according to data from Chinese customs. However, increases were reported for several non-Australian origins, including the United States, Canada and Russia, which increased by 672%, 80% and 75% year-over-year, respectively. Imports from Mongolia fell 21% year-on-year between January and August due to pandemic border restrictions.

There has also been a trend towards diversification of supply sources, with Mozambique, Colombia and Indonesia having sent 620,000 mt, 398,000 mt and 1.5 million mt respectively to date in 2021. “Despite the low tonnage, these cargoes could prevail and even increase in volume as long as the unofficial import ban remains, “said an international trader.

Coals from the United States and Canada accounted for approximately 94% of total PHCC and low-volume hard coking coal volumes, based on CFR China, in the first three quarters of 2021, according to observed transaction data by Platts. In the PHCC segment, the most popular brands were reported as Oak Grove, Blue Creek 7, Raven, Affinity and Rustic Ridge which together with other brands contributed a total of 2.35 million tonnes of trade. spot observed for the third quarter in both countries. .

In the pulverized coal injection coal segment, Russia has become China’s top supplier. Platts observed a total spot trade volume of 1.06 million tonnes of Russian PCI between January and August, up 158% year on year. However, logistics disruptions in the third quarter reduced the flow by 34.5% in the third quarter compared to the second quarter, after the main Russian Trans-Siberian railway was shut down when a bridge collapsed during heavy rains and flooding in July, causing supply disruptions.

The delivered volume of processed coal is expected to remain low in the fourth quarter, based on spot trade data observed by Platts. For the third quarter, Platts saw only 2.6 million tonnes of processed coal to China which is expected to arrive in the fourth quarter. There is usually a two-month delay between a transaction and the arrival of the physical cargo in China.

“We believe that the import volume in the fourth quarter will remain at a low level unless there is a change in China’s import regime,” said an international trader.