This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in steel, iron ore, metallurgical coal, scrap and alumina. 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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Asia's seaborne metallurgical coal market may face a tumultuous second quarter as the low-priced environment looks set to stay given China's continued absence from Australian coals, which has had a profound impact in the physical market. Norms have been disrupted amid the onslaught of cargoes changing hands as non-Chinese steelmakers swap existing term cargoes for cheaper counterparts in the spot market.
The price volatility in the first quarter of 2021 may feature in Q2 given weather concerns in Australia, China's ongoing steel production cuts and environmental measures. Platts PLV FOB Australia benchmark moved in an inverted V-shape in Q1, jumping from near $100/mt at the start of the year to over $160/mt on Feb. 1, before sliding to $112.50/mt towards the end of Q1.
This has left the metallurgical coal market to be described as "unsettling", at best, as the industry attempts to stay afloat in a season of low prices.
#Metcoal price volatility in Q1 may feature in Q2 given weather concerns in Australia, China's ongoing steel production cuts and environmental measures.
Met coal trade review: https://t.co/02mvGQZxA4
Where do you expect premium hard coking coal prices to be at in Q2?— Platts Metals (@plattsmetals) April 15, 2021
Industry players turn to ex-China markets for price direction
The volume of spot transactions from the likes of India, Europe, South America and Southeast Asia were higher for the Q4 2020-Q1 2021 period.
Platts observed the volume of spot transactions of premium hard coking coal for ex-Chinese markets at 3.8 million mt in Q1, down 22% quarter on quarter, but up 217% year on year.
Market participants attributed the surge in ex-Chinese demand to the low price environment over Q4 2020-Q1 2021, with PLV FOB Australia averaging $108/mt in Q4 2020 and $127/mt in Q1 2021. This compares with the average Q1 2020 price of $155/mt, Platts data showed.
The wild card for the Q2 price outlook has been the Australian weather, which is expected to be wetter than usual across eastern Queensland in April-June this year, according to the Australian Bureau of Meteorology. However, BOM has also forecast that the 2020-2021 La Niña weather phenomenon is nearing its end.
The medium-term supply outlook for Australian met coal, however, remains supported. According to data by S&P Global Platts Analytics, Australia's met coal exports are forecast to increase moderately in 2021 to 173 million mt, from 171 million mt in 2020.
Also in the Platts Metals Trade Review series:
- Global steel imbalances present export opportunities in Q2
- China's policies cast shadow over price strength of iron ore
- High freight costs, regional steel prices seen supporting ferrous scrap in Q2
- Alumina stumbles despite commodities, aluminum boom
Weaker grade coal prices climb higher, relativities narrow
Persistently tight spot availability in the pulverized coal injection segment, coupled with strong demand amid high metallurgical coke prices globally has led users to turn to PCI as an alternative in Q1.
The price spread between PCI and PLV narrowed to a historical high of 99.5% on March 24, compared with the average relativity of 72% since Oct. 2011.
The floods in New South Wales had caused thermal coal prices to rise, and on an energy adjusted basis, should lead to higher semi soft prices. However, users will reduce their usage of semi soft, which acts as a filler in the coke oven, and replace it with competitively priced coking coal.
The price spread between semi soft and HCC narrowed to a historical high of 97% on March 26, compared with the average relativity of 72% since Oct. 2011.
Industry sources said the high relativities reflect an inefficient market mechanism. Such outcomes are unsustainable from a coal blending perspective, and a price adjustment should ensue.
China buyers settle in a new normal without Australia
Liquidity in the Chinese market was thin in Q1 as spot supply of premium hard coking coal from outside Australia was limited with producers prioritizing their term customers. In Q1, spot transactions of premium hard coking coal bound for China stood at 790,000 mt, down 54% quarter on quarter and 81% year on year.
Industry sources expect more non-Australian coals to make their way to China in Q2 with no favorable policies expected for Australian material. China's statistics have shown a marked increase in imports from Canada and Russia, up 55% and 24%, respectively, over 2019-2020 . This uptrend is expected to persist through 2021.
However, weak global metallurgical coal prices also mean that non-Australian producers may not have the ability to increase their coal production in the short run. Chinese buyers are likely to rely heavily on domestic coking coals, which will support domestic prices, leaving the import seaborne PLV arbitrage at a contentious level.
China to dominate trade flows, guides global coke prices
The correction in domestic coke prices have resulted in the expectation that China will dominate trade flows as a key exporter, guiding global coke prices in the coming months.
In Q1, the differential between export and domestic coke prices turned positive.
Strong global steel prices will also translate to higher demand for raw material, and support China's role in the market.