This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, metallurgical coal, copper, alumina, cobalt, lithium, and steel and scrap. 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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Register NowFirm seaborne appetite from ex-China markets in the third quarter is likely to arrest the recent free fall in Asian metallurgical coal prices, while improved spot supply would counterbalance the demand fundamentals.
The benchmark Platts Premium Low Vol Hard Coking Coal price dipped 22.3% quarter on quarter to $233/mt basis FOB Australia in the second quarter to June 30 while the delivered price slid 28.9% over the same period to $224/mt basis CFR China, according to data from S&P Global Commodity Insights.
China's uptake of Australian coal patchy
China-based buyers were priced out of the Australian coal market for much of Q2 amid the decoupling in FOB and CFR prices. Nevertheless, the continued improvements in China-Mongolia and China-Russia trade routes, along with rising domestic supplies, could mean that China's reliance on Australian cargoes lessens further, sources said.
Lower grades such as Mongolian and Russian hard coking coal, pulverized coal injection and semisoft coals continue to make inroads to China, although they alone are unlikely to fully replace Australian premium hard coking coal that boasts of superior properties such as higher CSR, low sulfur and ash contents.
Chinese mills have found some solutions to this, like blending domestic high sulfur PLV with low-sulfur Russian materials to achieve desired specifications, according to steelmaker sources.
Import volumes of coking coal from Mongolia and Russia jumped 254% and 65% year on year, respectively, in the January-May period, while imports from Canada and the US dipped 9% and 19%, respectively, in the same period, Chinese customs data showed.
Domestic coking coal prices in China, meanwhile, remain a wild card for the CFR China market in Q3.
Some Chinese mills were more willing to purchase seaborne coal with later arrival dates in Q3 on a floating-price basis, after seeing a steep fall in domestic prices in the earlier part of Q2 amid weaker-than-expected downstream demand.
China's crude steel output from January to May stood at 444.63 million mt, up 1.6% year on year, according to the National Bureau of Statistics.
Market participants expected crude steel output for the rest of the year to decrease year on year so that China is able to cap its annual total output at 1.02 billion mt, unchanged from 2022 levels, amid the push for high-quality economic growth.
As such, sources expressed bearish views on domestic raw material prices in Q3, especially in July, amid production restrictions in the steelmaking hub of Tangshan in a bid to curb air pollution.
Domestic steel mill margins remained in the red for much of Q2 with both HRC and rebar product margins at their quarterly lows of below minus $30s/mt in late-April. The margins improved slightly in June as the steel market remains hopeful of Beijing possibly rolling out stimulus measures for the property sector, especially at a Politburo meeting late-July.
Lower-grade coal relativity dips
The FOB value of low-vol PCI and semisoft coking coal in relation to PLV softened further in Q2, averaging 85.95% and 75.09%, respectively, from first-quarter levels and the record relativities of 106.65% for low-vol PCI and 92.37% for semisoft coking coal on May 25, 2022, following the Russia-Ukraine war.
End-users expected the relativities to narrow further in Q3 toward historic averages, on the back of increased spot availability of PCI from miners and some end-users looking to resell, as well as a weaker thermal coal market.
Q2 saw a few Australian low-vol PCI trades concluded by ex-China end-users, like those in India and Indonesia, but the general lukewarm reception among ex-China end-users, including those using cheaper PCI of alternative origins, could make China the clearing market for Australian PCI later in the year. The current wide gap between FOB and CFR China prices was exerting pressure on FOB prices, a Singapore-based trader said.
A slump in thermal coal prices in Q2 amid high inventory levels in Europe and a falling natural gas market has kept semisoft from being directed to the power segment. A few end-users said they should be able to procure replacement tonnage if they have any requirement, after an Australian semisoft producer informed them of operational disruptions that are expected to affect supply in Q3.
As heat waves have started to scorch parts of the Northern Hemisphere, it remained to be seen whether thermal and semisoft coals will find some support later this summer, a northeast Asia-based steelmaker source said.
India diversifies coal basket
Amid the price volatility, Indian end-users are likely to keep diversifying their procurement options.
"We would opt for US coal now [when we procure next] as they are better priced [than that of Australian coals]," an Indian end-user said.
Alongside the influx of competitively-priced US coals and Russian semisoft and PCI, second-tier coal from destinations like New Zealand, Ukraine and Poland have also started landing in India as sellers target one of the key regional demand centers in the absence of major buyer China.
Several end-users sourcing coal were seen to have procured second-tier US coals at fixed CFR prices or at a discount against the benchmark PLV HCC FOB index, according to sources.
More indicative offers and tradable values for US coals were seen in Q1 and Q2 from Indian end-users, especially coke producers that have a greater flexibility to tweak their blends than steelmakers, according to data from S&P Global.
Offers for US HCC were heard within $320-$379/mt basis CFR India in Q1, and the levels softened to $227-$230/mt CFR in Q2, S&P Global data showed.
Indian steelmakers have started diversifying their coal feedstock baskets to blend and reduce production costs, with finished steel prices continuing their bearishness.
Market participants maintain that a PLV HCC FOB price range of $220-$230/mt FOB can be absorbed by steel mills, although merchant cokeries were aiming to book tonnages at lesser than $200/mt CFR India levels.