Coking coal rallies as Chinese domestic tightens

21 Jul 2017 Marian Hookham

Despite relatively minor impacts on recent supply demand fundamentals, seaborne coking coal spot prices managed to rally over the past fortnight, reflecting, again, China's oversize influence on coal markets.

Chinese steel mills this week paid as much as $177/t CFR for premium Australian coal, well above a "ceiling" of $160/t CFR declared two weeks ago by a number of Chinese steel mills as the cut-off for any interest in seaborne coal.

So what's changed in recent weeks?

Several factors are propelling the current rally, including supply tightness in Australia (see story below). But according to multiple sources it is the growing tightness of domestic coal availability which is the primary factor.

The NDRC has even moved to revoke export licences for July to August, affecting both thermal and metallurgical coal, according to sources. The aim they say is to cool prices and increase domestic supply, albeit slightly.

IHS Markit export data shows in the year to May 2017 China exported 2 mt of thermal coal and 1.4 mt of coking coal, averaging about 700 kt/month.

The possibility of domestic supply becoming tighter has been flagged for some weeks after Shanxi coking coal miners made self-imposed plans to cut production. These plans seem not to have been formally announced or required by government some Chinese steel mills responded by turning to the seaborne market.

Meanwhile, China's massive steel sector has been steadily moving from contraction to expansion thanks to healthy steel margins while domestic coal and coke prices have also risen in tandem. This has all been fed by positive macro-economic data which in turn has seen market sentiment turn bullish as evidenced in continued price lifts in futures markets for coke and coal (more below).

The coking coal price rally kicked off last week with a couple of trades at $161 and $165/t FOB, respectively, for August loading Panamax cargoes of Australian prime hard coking coal. At the time a leading Chinese trader was believed to have done both deals in anticipation of coal supply becoming tighter.

A new deal last Friday for a 75,000 t cargo at $165/t FOB via a broking screen confirmed the upward trajectory had legs.

In the last few days two cargoes of BHP's Peak Downs coal sold at $174.50/t CFR to Jiacheng Steel and $177/t CFR sold to Ansteel. The latter deal was reportedly done by the same trader who picked up the aforementioned two deals. The trader is believed to be currently negotiating the sale of the second cargo it holds at similar levels. Offers to end-users were reportedly touching $180/t CFR by the end of the week (to July 20).

"The volumes procured from the seaborne market are small by comparison with what is bought domestically," said one source. "This means when a Chinese steel mill thinks there will be a domestic shortage they will be prepared to buy into a rising market to ensure they have supply locked down. Price consideration is secondary, particularly when they are very incentivized to produce as much as they can to capture margin."

Asked whether the port restrictions in China were impacting coking coal the source confirmed what many others have said: only in a minor way if the affected ports become congested.

"If there is any overflow from these ports it might take us a few days more to unload vessels and handling may be a bit more expensive, but that's about it," the trader said.

Another factor that may be underpinning tighter supply is greater environmental scrutiny by the Shanxi provincial government. Sources say miners have been required to limit minemouth stockpiles to reduce dust which has meant production is virtually on an as-needs basis. Miners have also flagged their intentions to lift prices, partly as a result but also in response to the improving macroeconomic environment.

"If a Chinese steel mill thinks domestic prices will increase they would prefer to lock in a fixed price deal now with an Australian producer, knowing the coal will be delivered," a trading source said.

Positive Chinese economic data has also helped shift sentiment including the release of GDP data for the second quarter showing China's economy expanded 6.9% year on year in the second quarter, flat against the first quarter.

IHS Markit analysis points to faster industrial sector growth, improvement in infrastructure and manufacturing investment, and an acceleration in real estate sales and retail sales.

Meanwhile, the most traded (September 2017) coking coal contract on the Dalian Commodities Exchange has gone up 25% from RMB998.50 ($147) on June 19 to RMB1243.50 ($184) on 19 July. September coke prices also rose over the month from RMB1592 ($234) on 19 June to RMB1902 ($280) on 19 July.

China set a new monthly record for steel output of 73.23 mt in June while the total of 419.75 mt of crude steel production for the first six months of the year was also up 4.6% on the same period a year ago.

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Marian Hookham is a Senior Manager with IHS Markit and heads the team responsible for Australian, Indian and South African reports.
Posted 21 July 2017


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