2017 REVIEW: Coking coal market not catching a break

Supply disruptions and price volatility emerged as the two defining factors for the seaborne coking coal market in 2017.

With China’s National Development and Reform Commission opting against bringing back the restriction of 276 working days on coal miners, the main reason prices had soared in the preceding year, market participants were hoping volatility would be reined in this year.

But seaborne coking coal prices returned to the $300-per-tonne fob Australia level by April.

Metal Bulletin’s fob Australia premium hard coking coal index averaged $184.63 per tonne from January 2 to December 15, 2017, a 29.6% increase from the $142.44-per-tonne average in the same period of 2016.

The most crucial factor to affect the market in 2017 was Cyclone Debbie, which hit the coal-producing hub of Queensland, Australia, at the end of March and cut off nearly 10 million tonnes of spot supply.

Cyclone Debbie
The inception of Cyclone Debbie caused ex-Chinese buyers to panic, and demand peaked as coking coal cargoes were unable to be shipped out after rail freight operator Aurizon closed all four of its coal rail systems connecting mines to Australian ports.

As Australian miners declared force majeure, ex-Chinese end-users were forced to seek alternatives.

China suddenly found itself switching its role to a seller as inquiries from the ex-Chinese market poured in and Australian coking coal was resold from the bonded areas in China on an fob China basis.

Japanese steelmakers turned to China’s domestic premium hard coking coal while Indian end-users turned to Mozambique, and premium cargoes were heard settled around $250-300 per tonne fob Australia in April.

But prices crashed almost as quickly the following month, with the Queensland rail system resuming services quicker than expected.

A crucial fallout of cyclone Debbie was also the change in the quarterly pricing mechanism.

As suppliers and buyers in Japan failed to reach a fixed price for the April-June quarter, the period most affected by Cyclone Debbie, index-linked pricing was decided to be the best way out.

But the new mechanism came with its own set of challenges.

Questions regarding the acceptable premiums and discounts over the three-month index average also emerged, and for lower grades such as pulverized coal injection and semisoft coals the quarterly settlement continues to be based on one-on-one negotiations.

Ambiguity of Chinese policy
The Chinese government’s push to control pollution saw buyers of seaborne coking coal adjust their strategies throughout the year.

In mid-August, end-users in China’s steel production hub of Tangshan had their plans to buy imported coking coal foiled as the local government announced restrictions on the movement of trucks at north China’s Jingtang port to control pollution.

With the uncertainty on the implications of the aforementioned policy, end-users turned back to domestic supply.

In the meantime, an informal mandate to ports to limit imports slowed down the customs clearance process at southern Chinese ports, resulting in buyers delaying procurement.

Rising prices in the domestic coking coal market created an arbitrage opportunity for buyers unaffected by the trucking restrictions, and demand from these buyers gave support to prices for seaborne materials.

Supply-side disruptions return
Toward year-end, spot supply tightness again emerged as the main driver of prices.

Congestion at Queensland’s Dalrymple Bay Coal Terminal became aggravated in November, with one of its berths undergoing a month-long scheduled maintenance starting November 5, and with rail transport already operating at capacity with miners continuing to clear the backlog created by Cyclone Debbie.

Vessel queues swelled to a more than five-year high of around 47 in November.

Any doubts about the gravity of supply tightness were eliminated when European and Indian end-users snapped up premium hard coking coal cargoes at prices in excess of $230 per tonne fob Australia.

Metal Bulletin’s fob Australia premium hard coking coal index stood at $239.78 per tonne on Monday December 18, the highest level since April 25.

The market is now in a wait-and-see mode as buyers contemplate their next moves.

Some market participants believe that the seaborne coking coal price will remain firm until the first quarter of 2018, with ex-Chinese end-users scrambling to make sure they are well covered for any delays in shipments due to port congestion or a decrease in mine production.

Chinese end-users, who have been on the sidelines due to the recent price increase, are also expected to set the direction in the first quarter as they gauge price arbitrage opportunities.

Sophie Zhao

sophie.zhao@fastmarkets.com

Published

Sophie Zhao

December 27, 2017

05:00 GMT

Singapore