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Cyclone Debbie swings China into metallurgical coal supplier

Tropical Cyclone Debbie has left more than uprooted trees and overturned boats in its wake: The seaborne metallurgical coal market has also been upended, with China coming out as the top seller in the spot market from being the single largest buyer a year ago.



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The cyclone has caused huge supply disruptions to the seaborne market, leading spot prices to double within three weeks: from $151.50/mt on March 24 to its highest point at $304/mt FOB Australia on April 17 for Premium Low Vol, S&P Global Platts data showed.

Spot liquidity


But the most significant -- and unexpected -- change was China emerging as a key swing supplier, by switching immediately from being the single largest met coal importer in 2016 to the largest spot seller.

What is unique is that China is selling not just domestic coal, but also its import supply either through re-export or reselling China-bound cargoes.

Platts spot data showed China sold 2.8 million mt over March 27 to April 14, accounting for 51% of all spot trades concluded during the period. Of this, Chinese domestic materials comprised just around 355,000 mt, or 12.7% of Chinese sales.

Spot supplier


The rest was spilt among other supply sources such as Mozambique, Canada, US, Indonesia, Russia and parts of Australia that were not hit by the cyclone.

Sale of import materials by China can be in the form of reselling on-the-water cargoes, or re-export of materials sitting in bonded warehouses or have been discharged.

Most of China's sales were from the first two scenarios, while a very limited amount was from the third option. The third option was not preferred as sellers would have to pay 17% value added tax should they want to re-export these materials.

China turning seller is driven mainly by: a wide spread between domestic and export prices, sufficient met coal inventories at Chinese steelmakers and the proximity of China as an export hub.

Chinese domestic premium HCC prices remained generally steady throughout the onslaught of Tropical Cyclone Debbie, at Yuan 1,670/mt DDP Tangshan, equivalent to $185-$190/mt CFR China, over March 29 to April 19.

This was significantly below what the international market was paying for, which at its highest point hit $304/mt FOB Australia on April 17.

And for Chinese miners and steelmakers, that meant the arbitrage window was wide open to ship out both Chinese domestic supply and imported tonnages.

China could also afford to re-sell its imports as steelmakers had bought heavily post Lunar New Year, as import coal prices were highly competitive at that time.

China accounted for 85% of global spot trades from January-March 2017, which was considerably high in view of the 66% share it had in full-year 2016. This includes premium coal, second-tier, semi-hard, semi-soft and PCI materials.

Spot buyer


Specifically in the premium coal segment, its spot activities accounted for 84% of all spot trades in Q1, in contrast to 54% share throughout 2016.

Exports from China were also prized by the spot market as it is geographically close to other Northeast Asian buyers such as Japan, South Korea and Taiwan. The close proximity means a much shorter voyage time, which sources estimated to be nearly five days, could help solve the immediate short-term supply shortages faced by Northeast Asia as opposed to Atlantic supply options. American coal, for example, could see voyage time of more than a month.

Several buy side sources pointed to a "China premium" on cargoes sold by Chinese sellers due to the prompt laycan, as opposed to other supply sources during this period of time.

Chinese met coal has also been part of some Northeast Asian steelmakers' blend and therefore trade participants appeared to be willing to top up spot Chinese tonnages in light of sudden Australian shortages.

China exported around 1.2 million mt of coking coal in 2016, according to a Fenwei presentation in April 2017. More than half of its Chinese domestic met coal exports headed to South Korea, followed by Japan and North Korea, according to the Fenwei data.

Most of these exports in previous years however, were not on a spot basis, but rather term cargoes.

China's switch mostly opportunistic: Sources

China's sudden role reversal is driven by opportunism, rather than a reflection of any structural change, multiple sources said.

This is because trade participants believed that China is still structurally dependent on imports as the country lacks low ash, high CSR met coal which exporting countries such as Australia has an abundance of.

"China is trying to control its own coal production," one mining source said. "How can they sell so much, moving on?"

"China structurally lacks coal," another miner said.

The country imported 59 million mt of coking coal in 2016, according to customs data.

However, China has seen its import volume swing significantly across the years. Imports hit a peak in 2013 at 75 million mt before falling to 62 million mt in 2014, 48 million mt in 2015 and rebounding in 2016 due to the introduction of 276 work day policy at coal mines which meant a fall of 18% in working days.

While China appears to remain a likely net importer according to sources, the crux lies in its shift in volumes and magnitude in which it moves.

"China is not very stable," one source said. It is important to detect its switching point, of which much lies in the price competition between seaborne and domestic coal," said a source.

"China is a price sensitive market," another source noted.

China's role is also unique in 2017 when compared to previous cycles. Though China exported coal in 2011 and 2016, it was still a significant net importer during these two crises as domestic supply was tight.

Prolonged operational issues at the mines caused by Cyclone Yasi in 2011 saw China importing several spot tonnages at market levels, according to Platts spot data. Weather, logistical and Chinese reforms led Chinese steelmakers to import, and be part of the driver for the price uptick in 2016.

Comparisons with previous cycles


However in 2017, China was a significant net exporter of met coal during late-March to mid-April, leading one source to proclaim that China has helped bail out the world by providing emergency coal supply.

China's role as a swing supplier during this crisis was seen in a positive light by some steelmakers.

"It is good for China to be a supplier ... there will be more supplier source," one steelmaker said.

Another steelmaker said that China was a good option if end-users want to diversify away from Australia as a hedge for supply security.