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 seaborne metallurgical coal market is entering the fourth quarter with prices at an all-time high amid global supply tightness and healthy spot demand.
However, while participants anticipate prices could correct to the downside in Q4 as China's steel consumption slows and the possibility increases of higher supply across the grades, they generally expect prompt supply tightness to prevent a sharp fall in the near term.
This comes after benchmark premium low-volatile hard coking coal prices surged 100.3% quarter on quarter to $388.50/mt FOB Australia at the end of Q3, while PLV CFR China rose 95.4% over the same period to $603.75/mt.
Global supply tightness intensified in Q3, which was reflected in the decline in observed spot cargoes. S&P Global Platts observed 4.8 million mt of spot transactions for seaborne premium hard coking coal in Q3, down from 5.3 million mt in Q2 and down sharply from 6.2 million mt in Q3 2020.
Platts analysis of the laycans for the spot hard coking coal cargoes transacted shows a sharp fall in the observed volume for both Q3- and Q4-loading cargoes. Based on Platts data, a total 57 spot trades for Q3-loading cargoes were observed, down from 93 trades reported for Q3 2020. For Q4 loadings, only 22 cargoes have been reported to date, down 60% from 56 trades reported in 2020. The analysis considers observed spot transactions for PHCC and HCC, FOB Australia and CFR China, combined.
Market participants are highlighting the disequilibrium between demand and supply currently, saying supply has been unable to keep up with global end-user demand, especially outside of China. According to the World Steel Association, ex-China crude steel production rose 18.1% year on year over January-August, outpacing China's growth of 5.3% over the same period.
'Negative arbitrage' does not mean no imports
The price arbitrage between domestic Chinese and seaborne PLV material fell to minus $33.55/mt at the end of September, with domestic material the cheaper option. However, some Chinese mills continued to book import cargoes amid continuing tightness in domestic availability. Platts observed a total 670,000 mt of PHCC and low vol HCC transactions concluded on a CFR China basis for September.
Market participants attribute the spot import demand amid a negative arbitrage to the higher cost of domestic freight for certain mills and specific quality-related preferences for blending needs. Some mills in China's south can expect to pay Yuan 200-300/mt more for delivery than plants in the Tangshan region, for example. Some mills have also said they intend to continue importing material with low sulfur and low ash to help stabilize their blending mix.
The persistent supply tightness in China's domestic coking coal market spurred an unprecedented rally in domestic coal prices in Q3. Platts assessed domestic coking coal prices up 82.7% quarter on quarter, rising from $307.24/mt to $561.45/mt, as local government safety inspections and environmental regulations crimped domestic production. Import prices were buoyed over the same period by robust end-user restocking demand, with seaborne PLV prices surging 95.4% quarter on quarter.
Power crunch adds to Q4 uncertainty
Sharply higher global prices in Q3 for energy-related commodities, coal included, could throw a wild card into the market for Q4. Participants anticipate the differential between hard coking coal and PCI/semisoft coking coal prices on an FOB Australia basis to narrow in the near term as higher thermal coal prices support lower end met coals.
China's power rationing has also negatively affected steel production and demand for raw materials. According to Platts data, Hebei province is seeking to reduce its 2021 crude steel output by 21.7 million mt year on year to 228.07 million mt. Jiangsu, which has imposed power rationing on industrial users, has seen the biggest impact on crude steel output, with production down by at least 50,000 mt/day from mid-September. Jiangsu is China's second-largest steelmaking province after Hebei.
China's imports dip, diversify
With China's unofficial import ban on Australian coal persisting, its total import volume fell 41.6% year on year to 30.7 million mt over January-August, China Customs data showed. However, increases were reported for several non-Australian origins, including the US, Canada and Russia, which rose 672%, 80% and 75%, respectively, year on year. Imports from Mongolia fell 21% year on year over January-August due to pandemic border restrictions.
A trend for diversifying supply sources also emerged, with Mozambique, Colombia and Indonesia sending 620,000 mt, 398,000 mt and 1.5 million mt respectively to date in 2021. "Despite the low tonnage, these cargoes could prevail and even grow in volume as long as the unofficial import ban remains," an international trader said.
Coals from the US and Canada accounted for around 94% of total PHCC and low vol hard coking coal volumes, basis CFR China, over the first three quarters of 2021, according to Platts' observed spot transaction data. In the PHCC segment, the most popular brands were reported to be Oak Grove, Blue Creek 7, Raven, Affinity and Rustic Ridge which, along with other brands, contributed to a total 2.35 million mt of spot trade observed for Q3 from the two countries.
In the Pulverized Coal Injection coal segment, Russia rose to become the top supplier to China. Platts observed a total spot trade volume of 1.06 million mt of Russian PCI over January-August, up 158% year on year. However, logistics disruptions in Q3 reduced the flow by 34.5% in Q3 from Q2, after Russia's major Trans-Siberian Railway was halted when a bridge collapsed amid heavy rain and flooding in July, leading to supply disruptions.
The delivered volume of met coal is expected to remain low in Q4, based on Platts observed spot trade data. For Q3, Platts observed just 2.6 million mt of met coal trade to China that was expected to arrive in Q4. There is typically a two-month lead time between a trade and the physical cargo arriving in China.
"We believe the Q4 import volume will remain at a low level, barring any changes in China's import regime," an international trader said.