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, 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 price downtrend that dominated the seaborne metallurgical coal market in the second quarter looks set to extend into Q3, with construction activity expected to slow down in both China and India in coming weeks due to the rainy season.
However, prices also have the potential to remain highly volatile as western countries mull further sanctions on Russia and China grapples with how to revitalize its economy in the wake of COVID-19 lockdowns.
The benchmark Platts premium low-volatile hard coking coal price on an FOB Australia basis fell $213/mt quarter on quarter to end Q2 at $302/mt, while the PLV CFR China price fell $46.25/mt over the same period to $394/mt, S&P Global Commodity Insights data showed, amid increased spot supply and decreased steel demand.
Falling global steel prices were a key driver of the sharp fall in seaborne met coal prices in Q2. Hot rolled coil prices in India, Germany and the US fell 40%, 23% and 20% quarter on quarter respectively in Q2, S&P Global data showed, while weaker steel prices prompted production cuts in markets that use Australian coals, including Europe, India and Japan.
In China, domestic prices of HRC and rebar fell 12% and 10% respectively in June, while the domestic steel profit margin turned negative in late April and remained in the red for much of Q2. Both domestic HRC and rebar margins were estimated at minus $67/mt June 30.
Spot liquidity rises, but still lower than 2021
The observed spot transaction volume for Q2 was 2.23 million mt, up 33% from Q1, as Australian mining companies typically sell more spot material to meet fiscal year-end targets in June. Some cargoes were resold by end-users amid weakening downstream steel consumption. The equivalent of one full Panamax Australian PHCC cargo was sold by end-users in the three months to end June, compared with one cargo every five months in 2021.
The outlook for Q3 liquidity could swing as the increase in spot offers could be partially offset by a seasonal decrease in demand from both China and India, where Q3 typically marks the rainy season, which slows construction activity. Some market participants said spot liquidity could also depend on the interplay between met and thermal coal, as more PCI and semisoft coking coal may be switched to thermal coal in Q3 if the latter pays better during the peak summer demand season.
More Russian coal for China, India
An imminent European ban on Russian coal exports resulted in more Russian tonnage flowing to China and India in Q2. China's imports of Russian met coal surged 89% year on year to a record high 3.42 million mt over April-May, customs data showed. India reportedly imported 1.06 million mt of Russian PCI over April-May, up 220% year on year, according to iEnergy Natural Resources. Russian PCI accounted for around 44% of India's PCI imports over January-May, up from 30% in the same period a year earlier.
The surge in Russian met coal exports to China and India was due mainly to a significant price discount of up to 50% relative to Australian coal on expectations of a European ban on Russian coal, which forced spot trade flows to shift away from traditional markets like Japan, South Korea and Taiwan, as well as Europe. Consequently, some Indian buyers were heard to have reduced Australian PCI term contractual volumes in 2022 amid increased Russian supply.
The increase Russian exports to China and India could be sustained in light of new payment methods emerging. Telegraphic transfer is being used, with first payment after the contract is signed and the balance upon sight of shipping documents. Some Russian miners were also heard to be accepting Yuan to Russian banks and US dollars to Swiss banks, according to some sources.
Seaborne #metcoal market started Q3 under significant pressure with prices down 43% from late May. Where do you see it at end-Q3?— S&P Global Commodity Insights Metals (@SPGCIMetals) July 5, 2022
(Note: Results of this poll has no bearing on Platts price assessments)#metals#steel#Russia#China#India#Australia#tradereview
Relative value increases for lower-grade coal
The value of pulverized coal injection coal and semisoft coking coal in relation to PLV has strengthened since the invasion of Ukraine, with the PCI-PLV spread and the semisoft-PLV spread remaining elevated at end June.
Market participants expect the spreads to normalize toward the historic average in Q3 amid falling markets across the board, but also anticipate increased volatility as the impact of the Ukraine war on thermal coal and global energy commodity markets continues.
Tight spot availability in the PCI and semisoft coking coal segments in Q2, coupled with a strong thermal coal market, led to an historic high relativity of 106.65% on May 30 for PCI and a record 92.37% on May 25 for semisoft coking coal. This compares with their average relativities of 73.2% and 65.41% since October 2011.
"It's a tale of two coals, but clearly they're entering two different scenarios and hence could decouple in Q3," a market source said, adding that thermal coal prices typically remain strong in summer while met coal demand weakens due to the rainy season in Q3.
China a wild card for Q3
The interplay between China and the international market has been closely watched since prices fell in May. More spot offers from the US to China have emerged since late May basis CFR China. Many in the market compare the relative strength of price for arbitrage opportunities, and as FOB Australia was falling at a faster pace, China became relatively more competitive. The PLV FOB Australia price was assessed at $302/mt June 30, compared with a netback value of $370.60/mt for PLV CFR China minus spot Panamax freight.
However, China's domestic ferrous markets falling rapidly in recent weeks adds growing uncertainty to those betting on China as a better-paying market. Chinese steel mill margins for rebar and HRC were estimated at minus $70/mt June 30. In fact, based on S&P Global calculations, mills' profit margins were mostly negative throughout Q2, which resulted in sharp price falls in ferrous scrap, iron ore, met coke and coal by 47.61%, 24.87%, 37.08% and 17.63% on the quarter, respectively.
"Much of the Q3 outlook will depend on China, which can serve as a floor to the international market," a sell-side source said.