Teck, US met coal miners leverage China demand on Australian import restrictions

Miner Teck Resources and North American coal suppliers are targeting higher demand in China, after import restrictions were imposed on Australian coals.

The restrictions have led to pockets of stronger spot pricing in China for alternative low volatile matter and low sulfur coking coals and PCIs, compared with other markets able to absorb Australian supplies.

Teck may be emerging as a key beneficiary from its Pacific Rim supplies and flexibility on production volumes next year.

Teck said it has increased met coal sales to China during the fourth quarter at higher pricing levels than for sales outside of China, and plans to sell 7.5 million mt to China in 2021.

Shipping times from terminals in British Columbia to China, compared with US coals on longer voyages, may help traders and buyers meet timing risks and performance in China with market pricing.

A dislocation since mid-October between FOB Australia coal prices with CFR China price indexes may have limited the effectiveness of using derivatives for trade into China, due to wider basis risk.

US cargoes loading at the end of November and in December have seen sales destined for China in the past few weeks, with several premium HCC and low-vol cargoes finding stronger netback pricing in China, relative to FOB-based sales, many which are linked to published indexes.

A coal marketer said there was potential for still higher FOB pricing for cargoes loading in January on Chinese import demand, as indicated by the China CFR premium HCC index prices and coal relativities compared with Australian coals. Platts Premium Low Vol HCC rose $1 to $169/mt CFR China on Nov. 24, with PLV at $98.50/mt FOB Australia.

Uncertainty around China's coal import policy and record high steel and pig iron production through October may stretch the ability of domestic markets to cope with a longer-term absence of high quality Australian coking coals.

Australian coal imports surged in the first half of the year, and already surpassed 2019 total volumes by August, according to China customs data.

A purchasing round ahead of a resumption in Australian imports could lead current met coal spot pricing divergences by origin to close or narrow. There were shared expectations that this may occur in the first quarter, although there is also the potential for a more drawn out shortfall from Australia, sources said.

Comments from Australia's Prime Minister Scott Morrison may be seen as becoming more conciliatory toward China, while a resumption of coal imports was hard to call, a market source said.

Teck

Teck said estimated total fourth-quarter sales remain within existing guidance of 5.8 million-6.2 million mt, and about 20% of these quarterly sales are now to Chinese customers, owing to strong spot demand, in a Nov. 22 statement.

Pricing in China for Teck's coal started to increase around the middle of the current quarter, at a time when a large portion of overall sales were already concluded, the company said.

Teck, the world's second-largest seaborne coking coal miner, said on an Oct. 27 quarterly call with analysts it was seeing stronger-than-expected met coal demand in China.

Teck has restructured its sales book to target 2021 sales to China of around 7.5 million mt, with a plan to use CFR China pricing, "which currently reflects a premium to Australian FOB spot pricing of approximately $50/mt," it said.

The company detailed that the met coal sales volume to China are subject to a range of risks, including: general market and economic conditions; general and specific port restrictions; Chinese regulation and policies; and normal production and operating risks.

Teck sold 25 million mt of met coal in 2019, with customers also in Japan, South Korea, India, Europe and the Americas. Teck said contract sales to Chinese customers are priced on the basis of CFR China price assessments.

"The most recent three cargoes were sold at prices between $160/mt-$165/mt CFR China," it said.

"Additional spot sales to China were concluded gradually as the price was rising and achieved an average premium in excess of $35/mt above Australian FOB spot pricing at the time each sale was concluded," Teck said.

Teck said in a declining coal price environment, realized coal pricing relative would normally be lower than a long-term average of 92% to the benchmark.

Teck's Q3 met coal sales averaged $102/mt FOB, or 88.9% of the Platts PLV FOB Australia index average over the quarter.

Following stronger spot sales to China at a premium, Teck is estimating Q4 realized prices will reflect around a 92% relativity to benchmark, despite the price drop for markets outside China where the majority of Teck's steelmaking coal is sold, the company said.

In a presentation in May, Teck said it sells 40% of met coal volumes on quarterly contract pricing, with the remainder on shorter term pricing, including spot sales. Overall 80% of coal sales use index-linked pricing, with 20% at fixed prices, it said.