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Analysis: Australian thermal coal producers eye switch on wider semi-soft coking coal-thermal spread

Singapore — A widening spread between Newcastle semi-soft coking coal (SSCC) and thermal coal prices is creating incentives for Australian coal producers with coal-washing facilities to turn thermal coal into SSCC, although the current flat demand from Asian steel mills may dampen exports, said market sources.

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The price differential between Newcastle semi-soft coking coal and Newcastle 6,000 kcal/kg NAR thermal coal rose to $18.90/mt at the end of May after hitting $12.40/mt at the end of April, according to S&P Global Platts data.

The spread between these two coal products has been quite volatile over the past two years, touching 15 cents/mt on August 29, 2018, and rising to a high of $45.60/mt on April 13, 2017, according to Platts data.

A wider spread tends to result in an increase of Newcastle semi-soft coking coal exports, while exports of this product decline sharply when the spread narrows.

Thermal coal suppliers switch to sell semi soft coking coal amid widening spread

When the spread between the two Newcastle coal products jumped to $29.70/mt last November, semi-soft coking coal shipments from the Port Waratah coal terminals jumped to 17% of its total coal exports that month, or 1.17 million mt.

However, after the differential crashed to its end-August-2018 low, semi-soft coking coal exports fell to 7% of total Port Waratah Coal Services' volume, or 600,000 mt, in September 2018, according to statistics published by the coal terminals operator.

Exports of semi soft coking coal increases amid a widening price spread

Price is one part of the equation in determining whether Australian coal producers increase their exports of semi-soft coking coal.

Firstly, only Australian thermal coal with coking coal properties, such as a high CSN (crucible swelling number) of between 3 to 6, and a low phosphorus content is suitable for conversion into semi-soft coking coal, according to market sources.

Steel mills can utilize semi-soft coking coal with a CSN of 2, but anything lower than this will incur price penalties, and its phosphorus content has to be 0.1% or lower as too much can make steel brittle, said one market source.

Secondly, coal producers are restricted in the amount of semi-soft coking coal they can produce through their access to coal washing plant capacity and wash-plant economics, he said. Mine approvals from Australian state governments limit the amount of coal that can pass through coal wash plants, and running these at full capacity can be expensive.

Thirdly, when producing semi-soft coking coal from a wash plant, some coal volume is lost in the process -- up to 10% -- and this can impact profit margins, a source said.

Australian coal producers incur a cost of about $3/mt from washing thermal coal which has the effect of reducing its ash content from 14% to around 9% or less, he added.

At current prices, and after taking into account coal washing costs, there is a profit of $10/mt to be made from converting Newcastle thermal coal into semi-soft coking coal, according to Platts.

AUSTRALIAN SSCC CARGOES EMERGE AS THERMAL PRICES WEAKEN

According to Platts trade data, Australia's supply of SSCC in the spot market surged from April 2019 as thermal coal prices continue to slump due to the Chinese buyers' lack of interest in it. Their withdrawal was due to the Chinese government's import curbs on Australia's thermal coal as a measure to control volumes.

Amid the incentives for thermal coal miners to switch to sales of semi-soft, Australian miners have been actively making offers and seeking bids in the Chinese market, where demand has been lackluster for such a type of coal. Several Chinese steelmakers said it does not make economic sense to buy a 130,000-dwt cargo as semi-soft utilization rates in coal blending is low.

Australia's semi-soft coal typically ships in 130,000-dwt vessels and could last a Chinese steelmaker for a year. Semi-soft coals typically act as a filler in the coke oven, and cannot be kept for a long period of time as the quality of coking will deteriorate.

Semi soft coking coal spot trades volume surges in Q2 2019

Market participants expect the current weakness in thermal coal prices to persist for a few months due to China's ongoing import controls on Australian cargoes and a lack of spot demand from Northeast Asian markets. This may lead to a further increase in the differential between thermal and semi-soft coking coal prices, making higher production of SSCC more attractive for miners, said sources.

Platts last assessed Newcastle 6,000 kcal/kg NAR thermal coal at $71.70/mt FOB, and semi-soft coking coal at $90.60/mt FOB Australia on Thursday.

-- Michael Cooper, michael.cooper@spglobal.com

-- Yi-Le Weng, Yi-Le.Weng@spglobal.com

-- Edited by Shashwat Pradhan, newsdesk@spglobal.com

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