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Feature: PMV coking coal premiums may be new normal as flip from discount extends into H2

The coking coal market has witnessed an historical flip in recent months in the relative value of premium hard coking coal with low volatile matter (PLV) and premium mid-vols (PMV).

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Volatile matter represents the share of coal that burns off as gas in the coking process and for years, if not decades, lower-VM premium hard coking coals have been at the pinnacle of metallurgical coals. However, they have now been supplanted by PMVs as volatile matter shows its, well, volatile side.

The price relativity of PLV-PMV on an FOB Australia basis has been inverted since Nov. 12 last year, with PLV grades now trading at a moving discount relative to PMV grades. The relativity between the Peak Downs and Goonyella grades, for example, has inverted to negative $1.50/mt, with Goonyella priced higher than Peak Downs in the week ending June 28. Historically, this price spread has averaged at a positive $4/mt for Peak Downs, based on S&P Global Platts data.

Two main main factors are contributing to this market phenomenon: China's rejection of Australian coals following the unofficial import ban in late 2020, which created an oversupplied PLV market globally, and the strong recovery in global steel demand as pandemic restrictions ease.

China accounted for approximately 70%-80% of the seaborne spot met coal market observed prior to its halt of Australian cargoes.

This trend appears to have now become the new normal, and Chinese mills have adapted to it.

"Domestic steel mills have adjusted to importing more materials from countries like the US, Canada and Russia, and though it's not a 1-for-1 substitution, it does seem to help reduce the ash and sulfur content of domestic materials through coal blending," a Chinese trader said.

The strong recovery in global steel demand as COVID-19 vaccination programs roll out has supported the PMV market in general. Germany, Brazil and the US have seen an unprecedented rally in domestic steel prices since summer 2020, fueling increased appetite for PMV coals.

Many coke makers globally prefer coals within a narrow range of volatile matter (20%-25%) for optimal flame stability in the oven. Besides being more wasteful as more coal is lost as gas, high-volatile matter may be associated with spontaneous combustion, especially in low-rank coals. Low-volatile matter can cause wall pressure that damages the coke oven.

In comparison, China, which is focused on high CSR (Coke-strength-after-reaction) and has ample high-vol production, has a slightly lower VM target. A major steel mill in Jiangsu told Platts that "for VM, we have an average target of 18%-25%t."

For the first half of 2021, Platts observed 4.5 million mt of PMV transactions in ex-China markets, surging 221% from 1.4 million mt in H1 2020.

Some market participants argue that PMV premiums are becoming established in the absence of China as a market for Australian PLV tonnage. Others see it as temporary and expect the spread to normalize, citing PLV's key quality parameters, such as higher average CSR, which still in favor among modern blast furnaces across the globe.

"One challenge that Australian premium low-volatile hard coking coal is facing now is the low VM and the resulting wall pressure, and for that reason we will have to blend up the VM in the process -- that would increase the overall cost of production," a steelmaker source in Europe said.

"There were clearly winners and losers amid this policy-distorted market," an international trader said.

"Until China announces a change of import policy, I think North American mining companies like Teck Resources and Warrior Met Coal will remain the only few options to Chinese end-users, while the Australian companies like BHP and Anglo American will continue to rely on the traditional markets," the trader added.

The benchmark journey of seaborne metallurgical coal has evolved over the past decades. The Australian PMV brand Goonyella was the global benchmark grade in the 1970s-80s. It was overtaken by Australian PLV brands such as BMA's Peak Downs in the late 1990s and early 2000's, when market participants began to increasingly focus on CSR as a key indicator of coal value.

Since 2000, China has emerged as a clearing market of spot tonnage and a major consumer of PLVs, helping to further cement the benchmark status of Peak Downs.

S&P Global Platts publishes 10 Premium HCC brand relativities daily on FOB Australia basis, and 14 met coal brand assessments on CFR China basis.

Platts Iron Ore and Metallurgical Coal Specifications Tree