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 iron ore, metallurgical coal, copper, alumina, cobalt, lithium, 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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Asian metallurgical coal prices are expected to soften in the second quarter as supply disruptions in Australia are set to ease on warmer weather, while China's demand outlook is mixed amid uncertain steel requirements and the country resuming Australian coal imports after a near two-and-a-half-year pause.
The benchmark Platts premium low-volatile hard coking coal prices, on FOB Australia basis, averaged $343.91/mt in Q1, up from $278.13/mt in the previous quarter, showed data from S&P Global Commodity Insights.
Chinese steelmakers have indicated that they would be open to buying more Australian material in Q2, but added that it would depend on a workable arbitrage emerging between seaborne and domestic PLV as domestic prices have been under pressure since March.
Chinese mills' appetite for coking coal imports will depend largely on steel demand and prices. Margins for steel saw increased pressure in early-April amid production that grew on the year over January-March and a slow recovery in demand.
There is likely to be some pent up demand for steel from the country's property sector in early-Q2, following a subdued previous quarter amid the latest COVID-19 outbreak. However, this may not be sustainable and China's National Development and Reform Commission has asked for feedback from mills on output cuts for 2023.
Chinese mill margins for hot-rolled coil and rebar were at minus $22/mt and minus $19/mt, respectively, as of April 17.
Southern China is also expected to see heavy rains and flood in June, which will slow down construction activity and pose another downside risk to demand.
El Nino to aid Australian supply
Met coal output in Australia is likely to increase in Q2 amid forecasts for warmer-than-median temperatures over most of the country in April-June. The latter part of the forecast period is also expected to see El Nino conditions, typically associated with hot and dry weather that are ideal for mining operations.
Production from mines in New South Wales, a major supplier of semisoft coal, has been recovering steadily, sources said.
"Availability is good with US, Canadian, Indonesian and Russian coal available apart from Australian options," an Indian steel mill source said.
However, overall output might not exceed levels for the comparable period in 2022 and spot liquidity for Australian pulverized coal injection (PCI) and semisoft coals may fall below targets for Q2.
Australian PCI-grade coal production is also recovering slowly and operational disruptions at a major PCI mine will extend into Q2, a steelmaker source said.
Cheaper PCI options, especially those from Russia, are still out of reach for some Asian and European mills due to concerns over sanctions. The tightness could be offset somewhat by offers of non-Australian origin PCI and additional spot volumes amid operational issues at an international steelmaker, sources said.
Demand trends in China, Europe
Sources said they expect China to purchase higher amounts of premium low-vol coking coal from Australia in Q2, after the former ended its unofficial ban on imports from the latter. However, premium low-vol may be priced higher than mid-vol coal due to demand that may outpace supply.
Platts assessed PLV FOB Australia at $261/mt and PMV FOB Australia at $258/mt April 19, while PLV CFR China was at $275/mt, according to S&P Global data.
"Over the past three years, Chinese steel mills have managed to adjust their coal ratios to blend high sulfur and high ash domestic Chinese coals with low ash and low sulfur Russian coals," a Chinese trader said, "with most finding the standards of the coke produced acceptable for making quality steel."
For weaker grades of coal, industry sources expect non-Australian product to continue to make its way into China in Q2, particularly those from Russia and Mongolia.
"Metallurgical coal imports from Japan and South Korea will be slightly softer this year, while India will lift its imports on stronger steel output. We see China's seaborne imports staying flat on the previous year at around 38 million-40 million mt," said Sylvia Cao, analyst at S&P Global.
"Overall, we see FOB Australia prices falling 10% on the year in 2023. Prices may fall by more than this if CFR and FOB prices start to realign, removing some of the volatility seen over the past two years. Supply of premium coal is tight and always susceptible to price spikes due to heavy rains impacting operations in Queensland, particularly in January-March," Cao added.
Sources said Europe could also see higher demand for thermal coal and some support for semisoft prices in Q2, especially from May, amid expectations of a warmer summer. The bloc had gone through the second-warmest winter on record in 2022-23 and thermal coal inventories remain high.
Options for Indian cokeries
Indian cokeries considered seaborne coal of duty-free origin to be favorable to domestic material in Q1 due to workable arbitrage levels, however, this balance could shift in Q2 since both products are priced fairly close.
"Most cokeries in the east and south coasts have ovens that operate on silica bricks. It takes 30 days and costs around Rupee 450 million-750 million ($5.50 million) to shut operations, and then 60 days to reheat and make it operational," said another coke maker on why they have to keep ovens running even amid high coal prices.