— 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 iron ore, alumina, steel and scrap, and metallurgical coal. 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 sharp uptrend in seaborne metallurgical coal prices that kicked off midway through the second quarter is likely to continue well into the second half of the year as the global supply-demand balance continues to tighten, and the question now isn't how long the uptrend will last, but just how high can prices go?
The benchmark FOB Australia price for premium low volatile matter met coal surged 72% quarter on quarter to $194/mt in Q2, while delivered prices to China rose 43% over the same period to stand at $309/mt June 30.
For premium hard coking coal, Q2 was marked by strong underlying demand from ex-China buyers and tightening supply.
Platts observed a sharp 279% year-on-year increase in the spot transaction volume for the first half of 2021 for premium hard coking coal on an FOB Australia basis. The increase was driven mostly by strong European spot demand, especially over late Q1-early Q2. By end June, Europe accounted for 18% of Australia's spot export volume across various grades including premium hard coking coal, hard coking coal, pulverized coal injection (PCI) and semisoft, up from just 5% in 2020.
Meanwhile, spot supply seemed to be struggling to keep up in late Q2. Only 13 spot transactions for Australian premium HCC were recorded for July laycans, compared with 43 for June and 26 for July 2020, according to S&P Global Platts data. Popular brands such as Australian premium-hard Peak Downs and Goonyella have been in short supply, which has driven up bids and offers incrementally, market sources said.
Seaborne #metcoal market started Q3 on a strong note with prices up 8% from June. Where do you see it at end-Q3?
Trade review: https://t.co/roE56dQziy
(Note: Results of this poll has no bearing on our price assessments)— Platts Metals (@plattsmetals) July 14, 2021
China, on the other hand, has seen a sharp decline in its share of spot volumes to 47% of the total spot metallurgical coal market observed, down from 75% reported for 2020, according to Platts data. Top brands observed on a CFR China basis for 2021 to date include North American brands Oak Grove, Blue Creek 7, Standard and Raven.
"The majority of our consumption now is domestic coking coal, but we still had to rely on imports from time to time to help reduce the ash and sulfur in our coke blend," a Tangshan steel mill source said.
As North American tons have been diverted to meet higher bids in China, Australian volumes have moved in to replace them in the US' traditional markets. Europe is the typical case in point, and is symptomatic of a global redistribution of global met coal supplies.
The trend has affected both spot and long-term contract volumes, but can be observed more readily in the spot market. As can be expected, when Australian premium HCC became cheaper than US low-vol coal at a European parity point, spot volumes from Australia to Europe started surging.
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The price differential between Australian premium hard coking coal and US hard coking coal on a delivered basis to North Europe can be calculated using the spot Panamax rate for the US East Coast to Rotterdam, net-forwarded from Low Vol FOB USEC, and the Premium Low Vol HCC CFR Northwest Europe price.
The chart seems to suggest a negative correlation between price and volume, so that when Australian prices were relatively more competitive, the observed spot trade volume tended to be higher, and vice versa.
International trader sources regarded this "origin swap" between the North American and Australian coals as a "win-win" for North American producers and European steelmakers.
The observed spot trade volume outside of China declined in June due to a combination of supply tightness and rising Australian coal prices reducing the economic incentive for global steelmakers to use Australian premium hard coking coal.
China's imports remain under pressure
With Australian coal out of the picture and Mongolian coal being controlled at the border, China's coking coal imports fell a sharp 43% year on year to 18 million mt over January-May, according to China Customs.
That downtrend appears likely to persist into Q3, based on the analysis of spot trade data. Cargoes transacted today typically take a month or two to arrive, so it is possible to predict near-term future trends for China's import volumes by analyzing spot market activity. Platts observed a total 3 million mt of spot trades on a CFR China basis in Q2, compared with 12 million mt in Q2 2020 and 2.7 million in Q1 2021.
With most Q2 traded volumes likely to arrive in China in Q3, the data would suggest similarly low levels of Chinese imports for the coming 1-2 months.
Spot trade data tends to be a strong predictor of China's imports two months later, based on analysis of Platts spot data going back to 2016.
Chinese import policy is likely to remain the key wild card for the Q3 global market outlook. Any change in policy, while unlikely, "would not be impossible," one market participant said.
"The odds seem to favor the status quo for Chinese import policies for Q3, but with steel margins coming under pressure as a result of soaring raw material input costs, perhaps we could see the government move to encourage more domestic supply, or ease the import restriction, or both," a trader in China said.