Lacklustre demand dampen global coking coal prices

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By Aditya Sinha

The world now needs to make more steel to help build almost everything. And to this day, there still isn’t any better industrial method for producing steel in mass quantities without using coking coal. Second only after iron ore, it is the most vital ingredient required in the steel-making process – via the integrated blast furnace route.

At present, around 70% of global steel production relies directly upon inputs of metallurgical coke – for combustion in the blast furnaces – which is made by carburising coking coal, also called met coal.

Indian steel manufacturers are no exception to the use of this modern commercial process – apt for making steel on a massive scale – as the majority of production is done through giant blast furnaces that swallow large volumes of raw materials, namely iron ore and coking coal.

However, particularly in regard to availability of indigenous coking coal, the country’s total coal reserves of nearly 260 billion tons (BT) prove insufficient to meet its own growing demand, notwithstanding ambitious governmental targets set toward achieving self-sufficiency in the commodity from domestic resources.

As yet, India is importing well over three-fourth of its coking coal demand from key originating countries like Australia, Canada and the US.

This dependency has consistently increased in the last three years, while India became the world’s second-largest destination for seaborne coking coal after China, constituting approximately 13% of global demand in the spot market.

Meanwhile, the country has by now imported about 33 million tonnes (MnT) of coking coal till July this year, which is 8% higher as compared to imports of the same during this seven-month period last year.

Coking coal import prices have thus gained prominence as one of the key determinants for the steel sector’s profitability in India.

Coking coal export pricing has been extremely unstable over the recent past in the midst of inherent fluctuations of demand-supply fundamentals involved in the international commodity markets.

India’s coking coal imports

Month CY 2018 CY 2019
JAN 4.89 4.27
FEB 3.99 4.50
MAR 4.55 4.85
APR 4.21 4.38
MAY 3.80 4.50
JUN 4.23 5.33
JUL 4.85 5.14
AUG 4.90
SEP 3.16
OCT 4.41
NOV 4.32
DEC 5.71

Source:Steel360 Research

Coking Coal Price Correction Continues

Australian coking coal prices have continued to plunge throughout the past three months due to persistent weakness in global demand, primarily across major Asia-Pacific markets in China and India among others.

There has been further weakness in the seaborne metallurgical coal market driven by a declining steel market in Europe.

In a desperate attempt to attract buying interest, the Australian producers and sellers have resorted to reducing their offer prices in search of demand.

FOB prices for the premium low-volatile (PLV) grade of Australian hard coking coal (HCC) have fallen by roughly 20% since the beginning of the year, from USD200 a ton at the start of 2019.

Widely recognised as a globally-relevant benchmark index for tracking the spot price of physical prime-quality hard coking coal, Australian PLV met coal prices have been steadily dropping since mid-May; to hit a one-year low of $191/tonne at the end of June. By August, prices had hit a two-year low of $160/tonne.

 

Falling Prices Regenerate Chinese Demand

While seaborne coking coal prices are continuing to soften, China is experiencing an unprecedented resurgence of keen buying interest for Australian coking coal, simply because CFR China delivered prices are relatively cheaper compared to domestic coals of similar specifications.

Several spot trades have been booked at current low levels, as Chinese steel producers and other end-users resumed restocking, clearly to take advantage of competitive seaborne prices for Australian met coal.

By contrast, Chinese traders have been adopting a different, albeit utmost cautious, approach towards procuring imported cargoes in light of the fresh restrictions imposed at several major seaborne coal handling ports in the north, including China’s main coking coal importing port of Jingtang located in the north-eastern Hebei province.

 

China’s Anti-Import Policy Takes Effect

Although Chinese end-user demand appears to have increased in recent weeks amid expectations of further tightening of customs controls, there has been a persistent lack of buying activity observed from the country’s trader community at large.

That is partly explained by the recent reinforcement of anti-import measures at coal-handling ports, which apparently discourage traders from transporting foreign coal shipments on to Chinese soil.

In mid-July, Chinese officials had begun restricting customs clearance declarations to only local end-users; whereas overseas trading entities have thus effectively been debarred from unloading their imported coal cargoes at multiple ports.

Alongside renewed restrictions put in place at north China ports, prolonged customs clearance and cargo discharge delays at many other ports, particularly those in the south, have dampened seaborne buying interest.

China had initially imposed limitations on coal imports in the middle of last year but in November comprehensive bans were placed at all major coal import terminals for an indefinite period. Although there have been no reasons indicated by the government authorities, China’s unpredictable decision to limit imports was largely perceived as efforts to tackle oversupply conditions, besides favouring domestic suppliers.

Notably, China’s overall volume of coal imports exceeded the desired level permitted in the first-half of the year – boosted by expanded steel production – potentially leading to the implementation of restrictions. In fact, most of the Chinese ports are projected to exhaust their annual import quotas for coal by September.

During January-June this year, China has already brought in a total of 155 MnT of coal, including both thermal and metallurgical, which is an increase of 6% from the corresponding period of last year, as per latest shipment data.

 

US Coking Coal Prices Stay Flat

US metallurgical coal prices have remained relatively unmoved over the past couple of weeks, after being progressively lowered in the absence of prompt demand in the European markets and the continuing weakness in the Australian benchmark premium hard coking coal prices.

The steep price declines of the FOB Australia index for premium hard low-volatile coking coal in the Asia-Pacific market has pushed down prices of Atlantic metallurgical coal, especially of the US high volatile A coking coal grade.

The Atlantic met coal export markets have been hit by weaker steel prices and lower steel mill utilisation rates through the first half of the year.

Until recently, most European buyers held back metallurgical coal purchases anticipating prices to possibly decrease further, as met coke demand came under increasing pressure from widespread steel output cuts across north-west Europe.

A seasonal summer holiday period in Europe and North America further affected the demand momentum for US coals in the absence of many large traders and end-user buyers from the trade market.

With European buying slowed down, US coking coal exporters are largely focused on selling additional tonnages to India.

Nevertheless, the Indian demand scenario has turned lacklustre lately and any considerable improvement in import volumes is expected to resurface only after the monsoon rains recede.

At this juncture, it will be interesting to observe whether any considerable improvement in India’s import volumes – typically expected following the monsoon – can succeed in restoring global seaborne prices to the previously prevailed levels.