This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in metallurgical coal, copper, iron ore, alumina, and steel and scrap. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.
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The seaborne metallurgical coal market is entering the second quarter with bearish clouds forming after a roller coaster Q1 in which Russia's invasion of Ukraine further compounded global supply tightness.
Benchmark premium low-volatile hard coking coal prices hit a fresh record high of $670.50/mt FOB Australia March 9 before ending Q1 at $515/mt, while PLV CFR China surged 31% over the quarter to $443.25/mt.
Market participants anticipate that high prices could lead to a global supply response and demand rationing in Q2, and that more price pressure could be expected as the Australia's cyclone season winds down in April.
However, major uncertainties remain as geopolitical tensions continue to develop, while the recent resurgence of COVID-19 in China could impact the Q2 performance of Chinese ferrous markets at a time when steel prices typically rise due to seasonal factors.
Q1 spot transaction volume recovers
S&P Global Commodity Insights recorded approximately 2.1 million mt of spot transactions for metallurgical coal, comprising premium, second-tier, semi-hard and semi-soft coking coal and pulverized coal injection coal used for steelmaking in Q1, 10% higher than the 1.9 million mt reported for Q4 2021.
Spot market liquidity has been lower since 2021 than in previous years as a result of global supply disruptions and a broader shift toward long-term contracts. Adding to the supply tightness has been the Russia-Ukraine war, which removed some Russian met coal from global trade in Q1.
However, market participants see further increased liquidity in Q2, with more cargo loadings expected. In China, depleting port stocks, along with still resilient domestic met coal prices, could translate into higher demand for seaborne material. Based on China customs data, most of the 8 million mt of Australian met coal stranded by China's unofficial import ban in October 2020 had cleared customs and been imported by March, leaving very little spot availability at the portside.
War causing shift in trade flows
Russian exports account for about 10% of the global met coal trade by volume. Since the Russian invasion of Ukraine on Feb. 24, the market has seen European and Asian steelmakers scrambling for Australian spot supply to replace Russian material, in particular pulverized coal injection or PCI coal, which has traditionally been sourced from Russia.
Meanwhile, buyers from China and India have been buying spot Russian material at discounted prices relative to that of Australia. Some Indian and Chinese market sources told S&P Global that they were exploring the feasibility of using the Chinese yuan or Indian rupee as the settlement currency for trades in future.
Separately, the window for Chinese coals to be exported has gradually opened up due to the price rally in international markets. At the end of March, international prices for premium hard grades were $150/mt higher than domestic China prices, allowing Chinese materials to be exported much more competitively.
However, market sources noted that the actual exportable volume could be limited by the country's export quotas. Based on official Chinese data, only 91,532 mt of coking coal was exported in 2021, down sharply from 940,340 mt in 2020.
More pressure looms in Q2
The high price environment in Q1 prompted steel mills globally to raise steel prices to partially pass on raw material costs. Hot-rolled coil prices, which typically move in a similar direction to the seaborne met coke price, have increased across Germany, India and the US by 41%, 15% and 45% respectively since Feb. 20, S&P Global data as of March 31 showed.
However, seaborne met coal prices fell from $670.50/mt on March 14 to $515/mt on March 31, a sharp fall of $155.50/mt in just two weeks. There were signs of demand rationing observed when prices were at record highs in early March, with some end-users heard to be reselling cargoes from long-term contracts in the spot market.
Some market participants argue that downward pressure could take hold as supply tightness continues to ease into Q2. The total number of March-April loading Australian spot PHCC transactions was 150% above January-February loadings.
Other sources said that falling outside markets, including thermal coal, could also place additional pressure on weaker grades of met coal, especially PCI and semisoft coking coal, in Q2.
"It feels bearish overall, but there are still major uncertainties for the Q2 outlook, especially with the development of geopolitical tensions, the COVID-19 controls in China and whether Australian miners would bump supply to meet production guidance toward the end of their financial year [on June 30]," an international trader source said.