United States and Canadian spot coking coal prices could remain strong during the first half of 2021 as trade tensions between China and Australia continue, boosting those origins, while Australian shippers seek customers in Europe and Latin America.
As the China-Australia trade stand-off enters its fourth month the met coal markets continue to be bifurcated. Buyers in China are paying a high CFR price for low-vol prime hard coking coal (PHCC), with IHS Markit’s assessment for China low-vol PHCC at $208.00/t CFR on 8 January compared with $151.25/t CFR at the same time last year. The Australian FOB has fallen to $103.00/t FOB from $144.00/t FOB over the same period, according to IHS Markit assessments.
“China is the fulcrum… and it has changed the dynamics of trade flow since the last quarter of 2020,” a European steel mill source said, adding that 2021 is starting on the same note with US and Canadian sellers benefitting from China’s appetite for non-Australian coal.
Market participants estimate prices for MCC7 United States East Coast (USEC) low-vol could average at around $140-145/t FOB in the first half of the year. The MCC10 US mid-vol assessment is seen averaging $130-135/t FOB, high-vol A at $125-130/t FOB and high-vol B in the $122-118/t FOB range.
In the same period last year, the average prices for the above were at $121.00/t FOB, $120.88/t FOB, $120.72/t FOB and $111.54/t FOB, respectively, according to IHS Markit data.
The restrictions on Australian imports have allowed US suppliers to increase shipments into China since the last quarter 2020.
US exports of met coal to China have nearly doubled year on year in the last quarter of 2020, according to US Census data and estimates from industry sources. The country’s met coal exports in 2021 are expected to rise to 48 mt from 42 mt last year on expectations of increased global steel production as the world recovers from the effects of the COVID-19 pandemic, according IHS Markit analysis.
US Miner Arch Resources entered into a one-year term deal to supply US high vol A-Leer coal to China. The deal will run from second quarter of this year to first quarter of next year and is for one Panamax vessel per quarter (~75,000 t) for a total of 300,000 t.
The deal was hailed as a harbinger of more deals into China for different qualities of US met coal, from a number of suppliers.
End-users and traders are, according to market chatter, working overtime to continue to find met coal supplies from anywhere.
Coronado is understood to have sold a shipment of high-vol A coal to China from its Logan Complex to be loaded in the first quarter.
The deal, the company’s first HVA coal sold into Asia, also ties up the last of the company’s first quarter availability.
But the market is hungry for more than high-vol A.
Besides shipping high-vol A Leer coal, Arch has also booked a shipment of low-vol to China from its Beckley operations.
Meanwhile, Chinese buyers have also been buying met coal from Canada as they can supply full-size Capes, which is not the case for US suppliers.
Teck Resources, which cut its sales to China to just 10% of total sales in 2019 from 30% in 2013, noted last year a bump in volumes to China “above original expectations.”
In November, Teck said it was planning sales of 7.5 mt to China in 2021, equivalent to 25% of Teck’s planned sales for the year of 26-27 mt.
The second-largest met producer in Canada, Conuma has also increased sales to China, through November export volume of met coal through Ridley.
While Canadian and US suppliers are trying to meet the growing demand from China, Atlantic Basin buyers have been lapping up cheap Australian prime low-vol and mid-vol cargoes.
Atlantic Basin coking coal buyers in Turkey, EU and Latin America have bought on average 4-5 cargoes of spot Australian cargoes since the China-Australia trade stand-off began in September, according to market sources.
“Large mills have been buying cheaply available Australian cargoes and storing volumes for use operations across the Atlantic Basin,” a source said.
This year several European buyers have lined up deliveries of Australian low- and mid-vol cargoes for February and March loading with prices of Australian prime low-vol and mid-vol in the $102-105/t FOB range.
Meanwhile, demand for coking coal in Europe is strong as steel making is robust despite the latest round of COVID-19 related shutdowns.
“The order books are healthy, and we are trying hard to meet all orders,” a steel mill source said.
European Union steel production is expected to improve by 11% to 149 mt in 2021, according to the World Steel Association.
In Brazil and Turkey, robust demand from the domestic sector is driving up steel demand this year with most steel mills hiking prices of finished steel.
Steel producers in Turkey and Brazil expect crude steel production to rise to 36 mt and 35 mt, respectively, this year from 35 mt and 31 mt last year, according to estimates from various industry sources.
© 2021 IHS Markit®. All rights reserved.
The global energy complex is facing a near-perfect storm, as a rapid post COVID-19 demand recovery and a slower supply response, turbo-charge sentiment after a dismal year.
“Forget 2020, it was just a blip,” said an Australian trader.
Newcastle benchmark prices wobbled a little this week, but are expected to sustain the sharp gains seen over the last month, which sent the IHS Markit Newcastle marker to above $80.00/t, basis 6,000 kc NAR, into the second quarter.
The rally has also spread to Australian high-ash 5,500 NAR coal, largely dismissing China’s snubbing of Australian coal. The high-ash price ended this week at $54.38/t, up from $41.87/t at the end of November.
Industry participants say the thermal market is buoyant due to a supply shortfall while demand normalizes after the disruption caused by COVID-19 last year.
“Demand is almost completely normal, if anything, with a bit of a cold northern hemisphere winter and what seems to be a manufacturing-driven push out of recession, it would look like demand would be 2019 levels or better,” the Australian trader added.
On the other hand, supply has been sluggish with key producers across the globe cutting back production – some via outright shut-downs, and still others, especially in Australia, a bit more stealthily.
Adding to supply shortfalls, a shiploader at Newcastle Coal Infrastructure Group (NCIG) remains down, while to the north, rains in Kalimantan have led to force majeure and bottlenecks for higher c.v. Indonesian coals.
The high c.v. revival is especially being driven by a resurgence in key markets in Japan and South Korea and steady demand for Australian coal from Taiwan.
Taipower, which is the dominant power producer in the latter, is expected to keep its import levels this year at around 26-27 mt, sources said.
Sources in South Korea said while winter curbs were still in place, generators are expected to come back into the market for late Q1 and early Q2 tenders, with much of the tenders likely to be filled by Australian supplies.
Similarly, Japan, which saw a sharp decline in its thermal imports in the middle of last year, has been more active in the spot market over the last couple of months. And industry sources say it’s a trend that’s likely to continue.
“The Japanese are short for Q1, though they bought prior to Christmas… and will come back in the next couple of weeks,” a Japanese trader said.
Rally in energy complex
The rally in prices is not unique to Australian thermal coal, but part of a broader surge in global energy prices.
Sources say, for the most part it’s unfortunate timing for utilities, as coal supply cuts and disruptions have coincided with a rapid resurgence in demand.
Spot LNG prices have hit a six-year high, trading above $20/MMBtu, driven up by production issues both with Qatar LNG and supply out of Malaysia.
Also congestion through the Panama Canal has limited the passage of LNG vessels from the US Gulf with many ships being forced to take the longer eastward route around the Cape.
“Kogas, PetroChina, JERA, Unipec, all of them were short of LNG and made January (spot) prices surge,” said the Japanese source.
And with a severe winter in northern Asia, utilities in the north of Japan are understood to be running coal-fired power plants at full capacity and are booking all the coal they can to maintain flat-out operations.
Without additional spot LNG, generators are scrambling to secure fuel oil for their power stations, however oil prices are also surging, creating opportunities for additional gains in coal.
“We will the same price fluctuations we saw in 2018-2019, when (Newcastle) prices went to $110-120,” a second Japanese trader said.
The Australian trader agreed, saying there were no opportunities for fuel switching in the current environment.
“It’s become a momentum thing, one is not putting pressure on the other, but the fact is that neither is a hand brake on the other,” the Australian trader said.
“We don’t see switching going on,” he added.
China ban boosts Australian high ash
Australian high-ash hasn’t been left out of the rally either, though the reasons for the upside appear rather counter-intuitive.
Market sources point out that with China banning Australian coal, power generators there have had to scramble to secure supplies from elsewhere including from origins that would have traditionally gone to markets such as South Korea and India.
“The Chinese mopped up the Colombian, Indonesian and South African coal, and when the Indians were going to buy their usual, they were finding it wasn’t there.
"The Australians … made plans to not rely on China and the market was squeezed,” said a second Australian source adding that relative scarcity of high c.v. Colombian and South African coals have energized the Newcastle index.
And with demand from India starting to come in once more, Australian high-ash has also seen a rally in prices.
Coal shippers may not have much more time to take advantage of the bullish conditions.
The futures market, currently in backwardation, suggests a rebalancing by late March or April.
A recovery in Colombian output with the resumption of Cerrejón, opening of ice-bound Russian ports after the winter and warming weather in North Asia consumers will remove the drivers currently underpinning prices.
The wildcard, however, still seems to be China, and the Australian thermal coal stockpiled offshore, estimated to be around 3.00-3.50 mt. Odd vessels are finding new markets, but most remain at anchor.
“At some point it goes back into market, whether it is through vessels diverting or slow bleeding into the Chinese market, so that will be supply will be coming back into the market.
“When and where is a mystery but it is meaningful tonnage that will help balancing, just the same way it helped drive the rally,” the first Australian trader said.
© 2021 IHS Markit®. All rights reserved.
• Not another “new normal”?
• Could Aussie exports to China slow to a trickle in ’21?
• Australian import restrictions not likely to ease before April.
• China tapping Indonesian, S. African, Colombian thermal suppliers.
The coronavirus pandemic has introduced a number of phrases to wider audiences.
Phrases like “social distancing” and “new normal”, which along with Justin Trudeau’s explanation of how masks can help with “speaking moistly”, have become overused to the point of cliché, but unfortunately when it comes to the global coal market, “new normal” might apply.
In the past two months, seaborne coal shipments have been -- if not upended -- certainly disturbed, with cargoes from places like South Africa and Colombia going to mainland China -- a destination that rarely if ever features on their export cargo manifests.
At the same time, Australian coal is being offered at rock-bottom prices into India, and at higher prices into Chile.
From time to time, pure economics will make coal show up in odd places. A few years ago, one or two cargoes of Australian thermal coal were delivered into the Northwest European market when an arbitrage window briefly opened.
But this latest adjustment in trade routes was not driven by Adam Smith’s invisible hand; the hand in play seems more political in nature than economic. Simply put, Beijing is actively discouraging the purchase of Australian coal.
Admittedly, this is not the first time it’s happened. Throughout much of 2020, occasional rumors have surfaced of unofficial edicts against buying Australian product, but usually after a few weeks a bold trader tries to offload a cargo and when one gets through, the trade resumes.
However, this time it feels different, according to market participants, and we might be experiencing yet a “new normal” -- at least for 2021.
In 2019, China imported 299.8 million metric tonnes of all types of coal, of which 45.8 million tonnes was Australian thermal coal and 30.9 million tonnes was met coal. For this year to September, China has imported 239.6 million tonnes of all types of coal, with Australia’s share amounting to 74.91 million tonnes.
As a proportion of the total, in 2019 Australian coal supplied 26% of China’s imported coal requirements. That has risen to 31% so far this year. Australia’s market share was last at these levels in 2015, when it supplied 35% of the mainland’s import requirements.
However, that contribution is expected to fall for the whole of 2020 to just over 25% and could completely collapse in 2021 if China can maintain its chokehold on Australian imports.
Market watchers said that even in a best-case scenario, the restriction on Australian coal is not likely to ease before April, while others expect things to go on into the second half.
Beijing attempting to cap all imports
Evidence of that harder line is apparent in recent tendering. Beijing is attempting to cap overall imports from all origins at or below last year’s levels.
The exact target has not been formally announced but based on year-to-date imports will have to average 20.0 million tonnes a month for the last three months of the year, down from an average of 26.6 million tonnes in the year to September.
But with colder-than-usual weather predicted this winter and domestic supply constraints, Beijing has unchained some generators from the shackles of import controls.
A flurry of tenders from Chinese end-users has emerged across the last two weeks, with at least 12 end-users in the market for as much as 2 million tonnes of thermal coal from overseas.
But thermal coal at least will not be coming from Australia.
Instead, China is going further afield for some of its supply. IHS Markit has learned of five South African cargoes, estimated at around 800,000 tonnes, and seven Colombian totaling a little over 1 million tonnes have been booked, with talk of up to 10 South African and 12 Colombian shipments booked,
China has also signed a memorandum of understanding with Indonesia for supply of up to 200 million tonnes of thermal coal next year.
“It officially opens up the doors to more trading collaboration,” a source from another producer said, adding that such an agreement may spare Indonesia from the type of trade tensions that have erupted between China and Australia.
China imported 137.6 million tonnes of coal from Indonesia in 2019 and 107.5 million tonnes in January-September 2020, the latest available customs data show.
Some Australian cargoes waiting offshore are discharging. At least 10 vessels carrying 940,000 tonnes of Australian coal have been unloaded at Chinese ports so far in November.
But the volume is down sharply from 2.6 million tonnes in October and 5.8 million tonnes in September, according to IHS Markit Commodities at Sea data, and it seems unlikely that any traders would be bold enough to book fresh thermal cargoes.
China takes “special case” met shipments
China may be taking a softer line on met coal where alternative sources for Prime Low-Vol are much harder to find.
At the port of Jingtang last week, three Capes of Australian coking coal were given permission to discharge, sources said, describing these as “special cases”.
All three of the vessels involved are South Korean-owned and the discharging approval could be the result of a diplomatic negotiation between Seoul and Beijing, rather than any thawing of the strained relations with Canberra. If anything, relations are getting frostier.
In addition to coal, Beijing has targeted a number of Australian products from barley and timber to seafood and wine.
At its heart, the dispute is a tussle between the countries for regional influence. Australia has been vocal in its criticism of China’s human rights record, has restricted telecoms heavyweight Huawei from participating in 5G infrastructure projects on the grounds of national security and has pushed hard for an investigation into the origins of COVID-19.
China, for its part, has accused Australia of undermining efforts to deal with the coronavirus and of fomenting anti-China sentiment.
And with both sides ratcheting up the rhetoric, it looks like the new “new normal” for coal might stick around.
© 2020 IHS Markit®. All rights reserved.
In a sign of revival in Indian demand for South African coal, a leading Indian steel maker recently procured three cargoes of South African 5,700 kc NAR min material for its plant in eastern India.
“We see a pick-up in demand for steel between August-September and to fulfill our orders in hand, we have to raise sponge iron output. That is why we procured South African coal,” a company official said on Friday.
It bought a partial cargo of 40,000 t from a vessel that is on the water and will arrive in the next few days at Dhamra port. This contracted price is at a discount of around $7.50/t to API4 paper, currently assessed at $56.35/t for August and $57.30/t for September.
The steel maker also purchased two Panamax cargoes of the same material for early August and mid-August laycans at a discount of $7.25-$7.75/t to API4 paper. On a fixed price basis, that roughly translated to around $48.60-49.10/t FOB, basis 6,000 kc NAR.
The vessels to be loaded in August will arrive either at Paradip or Dhamra, with partial discharge at Haldia.
The steel maker is planning to book one more vessel for end-August or early September loading for its plant in Odisha, which has a total of 10 kilns to produce sponge iron.
All the kilns at the plant halted operations during the COVID-19 induced national lockdown, but one has since restarted using coal from its inventory.
The company hopes to restart four to five kilns by the end of August, for which it will require South African coal.
This steel maker is also taking coal samples from Australia and Russia to check if these can be used in place of South African coal.
Meanwhile, a few mid-sized sponge iron makers are also gearing up to re-enter the market in August, though some of them have coal inventories to last until mid-October.
At least two of these mid-sized plants recently purchased low priced domestic coal from Coal India (CIL) to test if it can be used in a blend for sponge iron production.
The plant-delivered price of domestic coal is around INR2,100-2,300 ($28-31)/t, more than 50% lower than the current price on plant delivered basis of 5,500 kc NAR South African coal.
The material purchased from CIL is expected to have fixed carbon (FC) of 32%, much lower than 52% average FC in South African 5,500 kc NAR and 58% in 6,000 kc NAR.
Several cargoes of South African 5,500 kc NAR were heard traded this week at discounts of around $13.50/t to API4 paper. On a fixed price basis, that translated to $39.30/t FOB, basis 5,500 kc NAR.
Offers by the end of the week were understood at a discount of around $13/t to API4 paper.
Last week, IHS Markit’s Richards Bay (5,500 kc NAR) marker was $39.99/t FOB, down from $40.13/t FOB the previous week.
A trader was understood to have purchased South African 5,500 kc NAR material for the fourth quarter at a discount of $14.50/t to API4 paper. On a fixed price basis, that translates to around $40.47/t FOB.
© 2020 IHS Markit®. All rights reserved.
The stockpile of unsold United States-origin metallurgical coal being held offshore China by trading company Xcoal Energy and Resources has been drawn down to manageable volumes, according to sources.
At one point last year, the volume topped an estimated 0.70-0.80 mt either sitting in vessels or held in bonded storage at Chinese ports, the bulk of which was the flagship Buchanan brand produced by ASX-listed Coronado Global Resources, according to shipping and other data sources.
As of Thursday, it is estimated unsold Buchanan stock in Chinese stockpiles is around 0.19-0.20 mt, consisting of the remnants of three cargoes discharged in April 2019 and one cargo discharged in January this year, according to port stock data seen by IHS Markit.
At the start of 2020, more than 0.50 mt of Buchanan coal was estimated to be on the ground in stockpiles at the key import port of Jingtang, including around 0.10 mt of material first discharged in China in 2018. Under Chinese regulations, import coal may be physically discharged onshore, but until it has been declared by customs, is not treated as imported material.
Coronado’s Chinese exports are handled by Xcoal; sales to Xcoal last year accounted for 54.2% of revenue from Coronado’s US operations, according to company filings.
Sources said this strategy has for many years provided export opportunities for the mine that would have been more challenging otherwise. Buchanan is well established as a desirable blend in China for its low-ash characteristics.
But the fluctuations of Chinese import demand and ever evolving policy developments appeared to catch Xcoal out in the last year or so.
It is understood at least some of the material exported to China by Xcoal was in anticipation of an improvement in the US-Sino trade relationship and a lifting of the 30% import tariff on US coals. Ultimately, the import tariff was reduced to 3% in March, but prior to that US coal proved too costly for most buyers, resulting in the accumulation of unsold stock.
The problem showed up in Coronado’s earnings reports when in April it reported it was owed $149m by Xcoal (up from $87m at the end of December 2019). It is believed the overhang was related to the unsold Buchanan material still waiting to find a home.
Since April some $40m has been repaid and the port stocks owned by Xcoal in China have started to decline.
Port data suggests the 2018 coal referenced above has now been sold in stock and trade transactions, most likely in small tranches of around 10,000-30,000 t.
Interestingly, while Xcoal’s strategy probably never envisaged a stock and trade business, selling smaller tranches appears to have been lucrative, relative to what other US producers would be able to achieve.
Put another way, in a time of port restriction uncertainty, having coal on the ground and readily dispatchable for small buyers has turned a risky potential problem into an opportunity.
Given the vintage of some of the material, concerns over coal quality concerns have arisen, but trading sources say degradation has not really been a problem so far.
It is further understood that at the end of June, Xcoal sold a Panamax-sized cargo of Buchanan to an end user in Tangshan above $90/t, excluding the 3% import tax, with the vessel discharging at Caofeidian last week. It is unclear if this material was fresh tonnage or had been stored in a vessel.
Meanwhile, saleable coal production from Buchanan has been ravaged by the current global economic slowdown, as the company’s second quarter earnings release revealed last week.
The mine’s tonnage dipped 58%, both sequentially and year on year to 0.5 mt in Q2, the first time since the 2009 recession volumes dropped below 0.5 mt/quarter, reflecting the severity of the idling of operations during April and May.
Over the past five years, the mine’s average output has been 4.5 mt/y. The output in Q2 by contrast translates into only 2.0 mt/y when considered on an annualized basis. While production has been reduced, the mine is operationally ready to increase production in the event demand increases rapidly.
This potential tightening of supply is noteworthy as Buchanan has a cost structure making it one of the most competitive sources of US-mined low-vol for seaborne as well as domestic markets.
In addition to a productive underground workforce, the mine is serviced by the Norfolk Southern Railway (NS). This allows the coal direct access to the railroad’s Pier 6 Terminal at Norfolk, Virginia as well as numerous domestic coke plants.
As a result, the mine’s production is a basic building block for multiple blend designs at domestic metallurgical coke producers.
Metallurgical coal mine cost curve data, in MineSpans Metallurgical Coal by McKinsey & Company and IHS Markit, estimates 2020 average costs for Buchanan at $89.70/t FOB vessel.
The most recent weekly IHS Markit MCC 10 US East Coast FOB low-vol price indicator assessed spot tonnage at $108.75/t.
Of the 4.2 mt of Buchanan coal sold last year, 75% was exported, of which 41% went to Asia, 18% to Europe and 16% to South America.
Xcoal declined to comment and Coronado had not returned phone calls at time of publication.
© 2020 IHS Markit®. All rights reserved.
Coal imports are being rejected at several South China ports as quotas have been exhausted, according to sources.
Cargoes have been either refused or stalled at 10 ports in five provinces - Hebei, Jiangsu, Fujian, Guangxi and Guangdong - all of which are said to be affected by a shortage of customs clearance quota.
Collectively, more than 40 mt was cleared in January-April by the customs authorities regulating these ports, with Fuzhou said to have seen a 30% jump in clearance in April.
A crunch on quotas was expected - as China’s imports have far outpaced the widely-believed, but never officially announced, cap of 271-299 mt for the full year.
China’s coal imports in January-April were up 27% on the year to 126.72 mt, which annualises to 380.16 mt, with the thermal portion up 70% on the year.
April alone was up 22% on the year, showing that importing has remained high in the wake of the COVID-19 outbreak and beyond the clearance backlog in January-February, arising from last year’s crackdown on imports.
“Quotas are running really tight in July and August. There are many power plants that do not have any clearance quota at all,” one Chinese trading source said.
Among the end-users impacted by the exhaustion of quotas is Zhangjiagang Shazhou Power Co Ltd, a Jiangsu-based utilities firm.
Zhangjiagang Shazhou Power is mulling the cancellation of at least five cargoes after its local customs authority, Zhangjiagang, warned that no imports could be cleared.
However, the utility did manage to get approval for two of its Indonesian low-rank cargoes bought through tender, and was locked in negotiations for clearance for the remainder, a source from the power plant said.
The company has bought and cleared 0.6 mt of imports this year, which is believed to far exceed the local customs authority’s cap, two sources with direct knowledge said.
A league of state-owned utilities firms in Fujian province said they have used up their clearance volume.
China Guodian, China Huaneng and China Huadian’s local power plants under the Fuzhou customs district have run out of clearance permits, trading sources said.
The Fujian Pacific Power, a local utility, was also close to hitting its limit.
Xiamen customs in Fujian has set its monthly quota under 0.48 mt, it is understood.
This tight scrutiny has forced Guodian’s Nanpu power plant to cut buying to only one cargo per month, up from four-five vessels previously, a trading source said.
Elsewhere, the Xinsha port, a major clearance hub in Guangdong province, also hit the red light, and Guangxi province, home to Fangcheng port, has flagged a quota crunch for thermal coal.
Along the upper north Yangtze river, some power plants were seen selling their seaborne cargoes at discount to other buyers who still have clearance permits, three trading sources said.
How China regulates its quotas remains unclear, and this is hitting market confidence.
There appears to be differing methods in how various customs authorities are allocating quota, with some seeming to be taking a monthly approach, others quarterly or reassessing as the half-year nears. But this is guesswork, and some feel the goalposts do get moved.
“We don’t have any idea how the quota system works on local level or up the ladder,” a state-owned power plant manager said.
Another power plant source cited one case where a major state-owned utility in Fujian was rejected from discharging for a prolonged period.
“This cargo was booked after communication with local customs, but when it arrived, there is no clearance and thus (it is) not allowed to discharge,” he said.
Expectations of quota shortages as well as increased curbs at ports will pressure major utilities to shift to the domestic market in the second half of the year, sources said.
As word of an increased quota crunch trickled through the market, the most active domestic futures jumped 3% on Friday to RMB 534.6/t, boosted by the expectation of increasing consumption of domestic coal.
The market widely expects customs to keep a tight grip on imports throughout the year.
“I am not seeing a chance that customs will relax its policy,” one trading source said.
Indonesians left guessing
The lack of import quota is a headache for China’s major overseas coal suppliers.
Miners in Indonesia say the “erratic” importing activity by Chinese utilities this year has been a considerable challenge in an already weakened market.
“We have received requests to delay only one shipment in June/July. Yet, another end-user is advancing their commitments with us. It’s a mixed situation,” said a source from a prominent East Kalimantan low c.v. producer, whose cargo was affected by the recent cancellations.
“Another buyer has asked for all their cargoes to be postponed and I have insisted that at least some be performed,” a trading source added. “We hear Chinese traders saying – we have quota while others don’t - but we can’t tell what’s what anymore.”
© 2020 IHS Markit®. All rights reserved.
Turkish steel buyers are seeking coking coal volumes for delivery in the third quarter as the construction and automotive sectors slowly get back into action.
A large Turkish steel mill is understood to be in the market for three Panamaxes totaling around 0.20 mt of mid-vol, most likely from the United States (US), and low-vol material from either the US or Australia, for delivery through to September.
The buyer is expected to push hard for large discounts, a US seller said, while some US shippers are understood to remain motivated to sell mid-vol given poor demand for coking coal from South America and the domestic market.
Another Turkish steel maker is also in the market for a Panamax of mid-vol material for July delivery. IHS Markit assessed MCC9 US East Coast mid-vol at $101.95/t FOB last week.
Turkey imported 1.80 mt of coking coal in January-April, up from 1.60 mt in the same period last year. The US was the largest supplier of coking coal, garnering around 38% of the market share, Canada 21% and Australia 19%, according to the imports data.
Turkey’s finished steel demand is expected to rise by 3% to 26.80 mt this year from 26.00 mt last year, according to the World Steel Association’s short range outlook (SRO) released today.
© 2020 IHS Markit®. All rights reserved.
Thermal coal exports out of the port of Murmansk are likely to be disrupted for at least six weeks after a rail bridge collapsed on 1 June cutting off transport links, according to trading sources.
A total of 40,000 t/d of thermal coal will be lost to the export market until the bridge over the River Kola is repaired, which could take six to eight weeks. It could mean the loss of up to 2.25 mt to the export market. Rail operator RZD has imposed an immediate ban on coal deliveries to Murmansk. Rising water levels on the river affected the structural integrity of the bridge causing its collapse.
News of the supply disruption did not rattle markets too much, as the European market is well supplied with natural gas and thermal coal stocks at Rotterdam, Amsterdam and Antwerp are comfortable for this time of year. API2 July coal swaps were assessed at $46.75/t, up from $45.80/t yesterday. There was no physical bid for July in the brokered market.
SUEK is the main exporter out of Murmansk, located on the Barents Sea. Stocks are understood to be low at Murmansk at about 0.25 mt. Inventory levels are kept to a minimum due to stricter environmental compliance requirements.
Ports such as Vystok could be an alternative option, but the terminal does not provide magnets to extract contaminating metal fragments. Ust-Luga port is also understood to be an option, but capacity to take extra railings is limited, as rail bottlenecks could be an issue.
There is no standing agreement with Taman port in the Black Sea and the cost could be prohibitive, due to the longer rail distance.
SUEK could have no option but to declare force majeure if an alternative export route cannot be secured.
Murmansk exported about 17.60 mt in 2019 and shipments for the first four months of the year were 4.90 mt, down from 5.25 mt previously.
© 2020 IHS Markit®. All rights reserved.
Pricing of semi-soft and PCI coal on a quarterly benchmark settlement system is becoming increasingly moot as key steel mills adopt hybrid models, with some moving to index-linked pricing.
A shift in strategy in recent quarters by Japan’s two leading steel mills, Nippon Steel and JFE, as both adopt divergent approaches, has become particularly problematic for other steelmakers who follow the benchmark system.
While Nippon has started pricing some volume of semi-soft and PCI ahead of the quarter, bulk of its purchasing is understood to be done on a negotiated basis two month into the quarter referencing the lagged prime hard coking coal settlements. Meanwhile JFE has moved to a more privately negotiated outcome.
For both producers and end-users that have semi-soft and PCI contracts linked to the Japanese benchmark system this mutating structure has made the quarterly “benchmark” pricing mechanism a challenge to assess and interpret.
With demand for semi-soft and PCI hardest hit by the COVID-19 pandemic and the slowdown of steelmaking globally, pricing has become particularly difficult due to the wide differential between spot and term prices.
As steelmaking capacities are cut, coke rates reduced, and blast furnaces idled, demand for semi-soft and PCI has cratered.
While Australian semi-soft producers rely mostly on Japan, South Korea and Taiwan (JKT) as key end-user markets, PCI buyers are more geographically diverse and hence Australian PCI producers are subject to greater pain due to the fall in global demand.
Market sources say Australian PCI producers, which export an estimated 35 mt/y, have had second quarter cargoes deferred by key buyers including in Japan and Korea.
Meanwhile, spot prices have plummeted from $95/t FOB in February to around $65/t FOB now, pushing the bulk of Australian PCI production into loss-making territory. With demand likely to stay stifled in Q3, a recovery looks remote.
But because a large proportion of PCI and semi-soft produced in Australia is priced on a quarterly contract basis, many producers are somewhat insulated, at least for now.
Come the third quarter, PCI shippers confirmed they expect Q2 deferred tonnages to be performed by buyers at prices that were agreed earlier, at around $110/t FOB for some. Should some of the steel mills still be awaiting a return to full production, their uptake of deferred tonnes will be limited, potentially posing an existential threat to PCI producers.
More price uncertainty likely
Contract prices for April to June are expected to be established at the end of May for prime hard coking coal, somewhere either side of $125/t FOB for prime low volatile coal if spot prices remain roughly where they are currently.
IHS Markit assessed prime low-volatile coal at $117.75/t FOB and prime mid-volatile coal at $110/t FOB on Thursday.
The lagged number will be based on average daily index prices covering March, April and May, following the lagged mechanism established by Nippon in 2017.
Based on previous settlements, the hard coking coal lagged price of $125/t FOB implies PCI could settle at around $90-95/t FOB. That is a good $30/t above where spot prices are now, begging the question as to why end-users ex Japan would agree to the higher price.
Market sources note Japanese end-users largely seek supply certainty and hence are willing to pay a premium, a case less applicable to other buyers.
As reported previously, in Q2, a forward price for limited tonnages with a small group of producers was agreed between supplier Foxleigh and Japan’s Nippon at around $110/t FOB, and a lagged number will emerge in the next few weeks. However, it is understood Japan’s second largest steel producer JFE has not published a unique settlement for Q2, and instead may have settled bilaterally with suppliers.
The absence of a publicly settled number has meant many global buyers and sellers of PCI who follow the Japanese benchmark are in a quandary over calendar Q2 pricing, with many contracts for April-June supplies still not concluded.
While some producers advocate Nippon reliant pricing, absent the availability of a comprehensive benchmark, buyers who reference the quarterly benchmark reject it, favoring a bilateral arrangement.
Semi-soft in the same boat
Market sources said there is uncertainty over the semi-soft settlement too, though to a lesser degree. This is largely because Australian semi-soft is mostly concentrated on the JKT markets. But more importantly, there is a distinction made between high vol Hunter Valley semi-soft and the Queensland product, which typically sells at around a 10% premium to the New South Wales material.
It is understood that while Nippon settles some volumes prior in the quarter, it is mostly for Queensland supplies, while the bulk of its procurement, chiefly of Hunter Valley semi-soft coal, is done via the lagged mechanism. This is in contrast with JFE’s procurement, which is predominantly for the Queensland coal.
But the lack of a publicly available price for Q2 has buyers of semi-soft also in a bind.
Shift to index?
While both Nippon and JFE are understood to be staunch supporters of the quarterly benchmark system and are likely to stay the course, other buyers appear less sanguine about the mechanism.
A shift in the quarterly benchmark system is already underway. Many Indian steel mills, including the public sector, which previously relied on the quarterly benchmark settlement have moved to index-pricing for a greater proportion of their PCI supplies. Still others including South Korea’s POSCO and European mills have increased the share of Russian PCI in their procurement portfolio, with the bulk of it linked to a floating price.
It is understood POSCO has steadily increased its PCI buying on index pricing, which now comprises 70% of its purchases and is looking to replicate the structure for semi-soft coals. The mill was believed to have awarded a spot semi-soft tender last year based on a combination of benchmark Newcastle thermal and semi-soft indices- a shift that has many producers uneasy.
With the Korean mill and some Australian semi-soft producers unable to agree on pricing mechanisms, it is understood a few term contracts have not been renewed.
But the shift to index for both PCI and semi-soft is not without challenges. Producers resist the move noting the abject lack of liquidity in the spot market that can reliably inform price formation.
Equally tricky is pricing the quality parameters of spot sales into discounted markets versus term volumes into premium markets. Shippers point out the value-in-use proposition is very different for these two categories and that spot sales, mostly into discounted markets, is for off-spec products and not premium brands.
However, many concede that opting for index pricing could offer both producers and end-users some flexibility. It may allow producers to optimize blending strategies to produce discounted generic coals for those end-users that are brand agnostic. But for those that are brand conscious, the benchmark system will prevail.
© 2020 IHS Markit®. All rights reserved.
Chinese miners have stepped up their fight for fresh import controls after being hammered by international producers “dumping cheap” into the market in recent weeks.
The China Coal Transportation and Distribution Association (CCTD) – the state-run representative body for domestic miners – is putting increased pressure on the state planner, National Development and Reform Commission (NDRC), to rapidly deliver new restrictions.
With China virtually the only market open for spot tonnage at this time, any push back on imports will be a significant demand shock for international suppliers.
Many believe that is exactly what lies in wake though, as CCTD turns the screw on NDRC to slash import quotas, citing that the livelihood of domestic miners is under threat.
In a May 6 letter seen by IHS Markit, CCTD blamed international producers for “dumping cheap fuel into the China market”.
Steel mills and coke plants have shifted to seaborne supply in the wake of the COVID-19 outbreak and cut intake from their domestic contracts, the association said in the letter.
“Some steel mills have increased seaborne procurement by 5% to 10% of total blending, and we have seen some irregular buyers emerge,” one seller confirmed.
Seaborne coking coal supplies at the gate of steel mills have been priced around RMB200-500/t ($28- 70/t) below domestic alternatives this year, the association said.
In IHS Markit’s assessment, the gap between CFR low-vol material and domestic Liulin material with similar quality was $44.78/t (equivalent to around RMB 313.46/t) on Monday.
That chasm in price led some steel mills to cut April volumes fixed on domestic contracts by 35% and 55% in May, the association said.
“Some steel mills even rejected executing [domestic] contracts, which makes it harder for producers to carry out production plans,” the association said.
CCTD has proposed NDRC tighten import quotas based on the average monthly volumes of the last three to five years.
Over the last three years, monthly coking coal imports averaged 5.8 mt per month and over five years averaged 5.2 mt per month, far below April’s estimated 6.3 mt.
Meanwhile, some of the surge in import volumes – up 22% in April – was driven by trader speculation and the entry of some commodities market-oriented Chinese investor funds into the physical procurement space, sources said.
In some cases, these are companies that offer derivative products, or may, for example, refinance cargoes purchased by end-users.
These marginal players and conventional traders have also, more controversially, been buying coking coal quotas from steel mills, effectively the clearance required to discharge at a port, as the arbitrage opportunity widens.
This has led customs authorities in the Tangshan area to crack down on these companies, which has included in one instance an Australian coking coal cargo being banned from discharging at the Caofeidian port last week.
But in its most serious warning to the NDRC, the association said the inclination to seaborne coal has threatened the livelihoods of mining workers and eroded margins for domestic producers.
“Traditional coal mining companies are defaulting on salaries to workers in a way that could threaten social stability,” the association said.
The association cited falling earnings at some of the largest miners, including a 15% decline in profits at Shanxi Coking Coal Group from last year and a significant increase in delayed payments to miners in Shandong and Henan.
This emotive message is likely to pressure NDRC to take a hard stance against imports as Beijing has employment on top of its agenda for this year.
The warning comes ahead of the parliament meeting on 22 May when officials are expected to set the political and economic agenda for the year.
Some trading sources said the recent development could hit them first and hardest.
“We are waiting to see how this unfolds as our cargo is still on the way to China” a trading source said. “It’s very likely some of the cargoes might not able to pass the gate now,” the source added.
The catch-up in Mongolian inflows has also weighed on the market share of domestic miners.
Shipments through the Ganqimaodu border checkpoint have rebounded to around 500 trucks per day, up from around 200 trucks per day when the border was reopened in early April.
Trading activity in the spot market has been abundant of late, with IHS market recording 4.4 mt of coking coal traded in the last four weeks, compared with 2.6 mt in the two months prior.
The IHS Markit assessment for low-volatile coal (MCC4) was $122.35/t CFR China on Monday, while mid-volatile coal (MCC5) was at $117.35/t CFR China.
By comparison, MCC4 was at $161.50/t CFR China and MCC5 was at $156.10/t CFR China as on 20 January, before the COVID-19 pandemic.
© 2020 IHS Markit®. All rights reserved.
Higher coal inventories across the supply chain, poor credit access, lack of working capital, cash flow issues and an upcoming monsoon will pose a challenge to India’s post-COVID economic recovery plans, with the country’s overall coal imports expected to shrink by up to a fifth this year.
Economists estimate that the current lockdown, which started in late March, has effectively shut 60-70% of the country’s industrial activity and a massive decline in steel output as construction, automotive and infrastructure sectors come to a grinding halt. With falling industrial output, demand for coal for power generation has also fallen.
However, efforts to jumpstart the economy by possibly further easing of some restrictions of the lockdown, which has been extended to mid-May, will likely be met with limited success. Already, relaxation in lockdown from 21 April for the industries located in rural areas and construction activities where workforce is already available has not had the desired impact.
As demand craters, both policy makers and coal end-users are taking steps to reduce the supply overhang with the government urging more domestic thermal coal to be used ahead of imports, while steel mills, unable to accept more feedstock, are on-selling coking coal cargoes. Buyers have also deferred shipments from late March onwards from Richards Bay Coal Terminal, Indonesia and Australia.
As a result, imports of thermal coal this calendar year are expected to shrink by 17-21% on the year, equivalent to 32-40 mt to 148-156 mt in 2020, from 188 mt in 2019, according to preliminary estimates by IHS Markit.
Similarly, coking coal volumes could see a fall to around 50 mt from around 61 mt imported last year.
The decline in imports will be most acute in the second quarter but will extend into the three months ending September.
The impact of the lockdown has extended across the entire economy with industrial coal users, cement and brick makers, steel and sponge iron, as well as power generators massively scaling back production.
Cement and sponge iron plants were shut through April while integrated steel plants operated at bare minimum and power plants at curtailed capacity on low electricity demand. The impact was particularly severe for the sponge iron sector. It uses around 25-30 mt/y of largely South African coal, creating an inventory build-up at RBCT.
Coal burn loss across these three sectors is expected to remain low in May at around 40 mt against consumption of 58.4 mt in the same month last year.
Domestic stocks build up
While coal demand has fallen sharply, coal output has been largely steady. As a result, on 23 April, India’s coal stocks at mines, ports, power plants and industrial users hit a record of about 165 mt.
Coal India Ltd’s (CIL) production between 1-25 April averaged 1.35 mt/d, down from 1.51 mt/d in April 2019 and 2.72 mt/d in March 2020, a CIL official said.
But dispatches fell to 1.25 mt/d between 1-25 April, down from 1.72 mt/d in March and 1.75 mt/d in April 2019.
Pithead coal stocks at CIL, SCCL and captive mines was nearly 80 mt, enough for 30-40 days of requirement. Stocks at various ports were around 25 mt, power plant stocks were around 50 mt, enough for 29 days forward burn, and other users’ stocks were estimated at 10 mt.
Govt directs more domestic coal use
That increase in domestic availability has prompted the country’s power ministry to issue a directive this week to all power plants requiring them to reduce their coal imports for blending purposes.
The directive could cut imports by around 10 mt this year, but 10-15 mt may still be imported against existing contracts and to take advantage of low global prices. Last year, imports by state and privately-owned non-coastal power plants were 24.5 mt in 2019, up 25% from 19.6 mt in 2018.
Imports by such plants in January-March fell 12% year on year to 5.4 mt, from 6.1 mt on better domestic availability and curtailed electricity demand.
The latest directive by the ministry may result in the deferral of two government tenders in Tamilnadu for a total of 1.76 mt. NTPC Tamilnadu Energy Company is in the market for 0.56 mt, while NLC Tamilnadu Power was expected to float a tender for 1.20 mt.
Steel sector faces headwinds
In the steel sector, many buyers are deferring or on-selling their coking coal cargoes as they contend with a collapse in demand which could extend beyond the monsoon season into the fourth quarter or even early 2021.
At least two cargoes of Australian prime hard coking coals for May loading have been resold by Indian steel mills in the last 10 days and more unwanted material will find its way into the spot market if the situation doesn’t improve.
And with the monsoon season expected to start in July, the window of opportunity for a significant economic recovery, and with it, steel demand, is narrow.
While much of the sector is “hot idled” or producing at minimal levels, should the government extend restrictions to the end of May without significant concessions, then steel makers may have to turn off the furnaces entirely and wear the high cost of restarting.
Even if the market improves ahead of July, given semi-finished product stocks, a recovery in demand for coking coal buying is unlikely as steel inventories are high.
Cash flow issues
High inventories bring their own issues restricting cash flow and locking up working capital, forcing companies to borrow more.
“If you have steel inventories worth $1bn in your books, it’s a real squeeze on receivables,” said a second Indian source.
And as companies face cash flow problems, banks are tightening their credit control and many are finding it harder to open Letter of Credit (LC) or financing.
“Banks are refusing to rollover LC payment due dates for buyers, who in turn are threatening not to pay,” said the first source.
The government has urged banks to give loans to companies for working capital, without any collateral, but sources say all this does is shift risk to the banks, which have already copped flak over loans to non-performing assets.
“Banks have to see how much lending they can give, they are doing a risk assessment. But then there’s a big credit bubble being created because people are losing their cash flow,” the first source added.
And with the banks under pressure for short term financing from medium and small enterprises, many would be unable to raise capital for a prompt restart.
Many point out even before the COVID crisis, India’s economy was struggling with GDP for December 2019 and March 2020 quarters seeing two successive decline, pushing the economy into a technical recession.
At that time, much hope was pinned on economic stimulus measures expected from the Indian government that had been expected in the February budget.
But the lockdown made this all-but impossible, making a significant capital injection much more urgent, but much less likely.
As industries have shuttered, the government’s indirect tax receipts have fallen, which again will force the government to prioritize spending, that’s likely to lean towards social spending rather than infrastructure.
That said, there is agreement that the government will ease some restrictions targeted to restart industries. Many feel smaller downstream steel consumers in states like Karnataka, West Bengal and Maharashtra will have to restart first.
“There are lots of small plants in Hospet, Kandla and West Bengal, where there are small steel and ferro alloy industries- these give employment to migrant workers.
“The economic revival relies on these, otherwise the economy will be on ventilator,” said the second source.
© 2020 IHS Markit®. All rights reserved.
Colombia’s thermal coal production by the country’s three largest producers fell 6% in the first quarter from the same period last year, according to preliminary National Mining Agency (ANM) and company data.
Output was down 8% from the fourth quarter of last year.
Drummond was the only producer that increased output from the previous quarter, while Cerrejón and Glencore’s output dipped, because these two mines had been producing at a lower rate compared with the previous quarter, and both were placed into temporary care and maintenance during the last week of March, as COVID-19 controls were rolled out.
The effects of the reduction in production as a consequence of the coronavirus will be seen during the second quarter of 2020.
Combined output from Drummond, Cerrejón and Glencore during the first quarter of 2020 was 17.69 mt compared with 19.19 mt during the fourth quarter of 2019 and with 18.77 mt in the first quarter of 2019.
During the first three months of 2020, Drummond’s output was 7.96 mt, Cerrejón’s was 5.93 mt and Glencore’s 3.80 mt. In comparison, during the previous quarter (October-December 2019), Drummond’s output was 7.94 mt, Cerrejón’s 6.95 mt and Glencore’s 4.30 mt.
This year’s combined output from the three producers was forecast at 73-75 mt, flat on 2019 levels, but this is expected to decrease by at least 5-7 mt due to the impact of COVID-19.
© 2020 IHS Markit®. All rights reserved.
Steel scrap demand from European blast and electric arc furnaces could rise as European steel mills line up a gradual resumption of operations leading to a short-term increase in steel scrap prices.
But with steel demand likely to remain capped by the slowing global economy, prices are likely to remain weak through the latter half of the year.
Inventories of various types of scrap used in steelmaking are understood to be low in Europe due to lack of collection under current circumstances as major manufacturing economies such as Germany, Italy, France and Spain are in COVID-19 related lockdown since March.
“Scrap deliveries have come to standstill since the lockdowns, so we are in a strange situation where low demand during lockdown dropped scrap prices to below the cost of collection, but the lack of collection and stripped-back steel production over the last eight weeks, has drawn down inventories so hard that prices could spike aggressively when mills restart,” an industry source said.
Scrap prices across the board are expected to rise 10-15% next month as steel mills could be scrambling for supplies once they increase production, according to industry estimates. Steel scrap prices have risen to $244.51/t on 30 April from $224/t on 1 April, according to London Metal Exchange (LME) data.
However, most mills are cautious about increasing production. At present, many European steel mills have dramatically cut output with nearly 19 mt of blast furnace capacity shut and others running at reduced capacity.
Where scrap is used in furnaces via the blast furnace-basic oxygen furnace (BF-BOF ) route, scrap is charged up to 25% in the BOF, the electric arc furnace (EAF) route relies almost entirely on scrap. On average the blast furnace route uses 1,370 kg of iron ore, 780 kg of metallurgical coal, 270 kg of limestone and 125 kg of recycled steel to produce 1 tonne of crude steel.
The EAF route uses primarily recycled steels and direct reduced iron (DRI) or hot metal and electricity. This route uses 710 kg of recycled steel 586 kg of iron ore, 150 kg of coal, 88 kg of limestone and 2.3 GJ of electricity, to produce 1 tonne of crude steel.
Around 70% of total global steel production relies directly on coal via the BF route, according to Eurofer data.
European steel mills consumed 94 mt of scrap in 2018 to produce 167.6 mt of crude steel. Blast furnace output accounted for nearly 60% of total production and EAF output just over 40%.
However, this year steel production in Europe is expected fall significantly with production in the second and third quarter down by almost 20%, a steel mill source said. This will cut scrap demand significantly on an annual basis.
© 2020 IHS Markit®. All rights reserved.
China imported a total of 2.00 mt of petroleum coke in the first quarter, up 8% on the year, as domestic refineries reduced output due to COVID-19, leading to increased demand for overseas material.
Imports in the first quarter of 2019 were 1.86 mt, according to IHS Markit trade data.
The United States was the main supplier with 0.65 mt, broadly steady from last year’s 0.62 mt. March saw a big month-on-month increase to 0.29 mt, compared to 0.18 in February. It was also nearly double last year’s total of 0.15 mt.
From 15 January this year, Chinese importers were exempt from a 25% duty imposed on US cargoes, subject to approval from the Chinese government. The two countries agreed to a gradual phasing out of the trade war under an agreement signed on 15 January.
Imports from Saudi Arabia were 0.32 mt for the first three months of the year, down from 0.43 mt in the previous year’s quarter. There was maintenance at two of the main exporting refineries in late January and early February, which reduced exports. Imports from Saudi in March were limited to 54,000 t, down from 83,000 t last year and lower than 0.13 mt in February. Saudi and the US mainly export fuel-grade higher sulphur (5-8%) petcoke which is used in power, cement production and glass making factories.
Deliveries from Colombia were 0.21 mt for the first three months of the year, up from 0.16 mt previously. There were no imports in March from Colombia, compared to 0.10 mt in February. Colombia exports a lower sulphur quality (<3%) content which is mainly used in the metals sector.
© 2020 IHS Markit®. All rights reserved.
The market fundamentals for metallurgical coal has worsened dramatically owing to impacts from the COVID-19 pandemic, with IHS Markit currently expecting imports of global metallurgical coal to decline by around 24mt in 2020.
But while announced and forced supply cuts have been fairly widespread, demand has fallen more steeply than the supply side response and substantially more cutbacks are needed to rebalance.
India is expected to see the greatest reduction in import demand, with a reduction of more than 7 mt expected. The current shutdown – recently extended, and prospectively further extendable – is a key driver here, with its impacts on near term coke and steel production and coking coal buying.
And arguably there is substantial downside risk to that number. IHS Markit has recently changed its outlook for the Indian economy this year, with India now expected to enter a recession with -1% economic growth. Coupled with the overall global recession, India’s steelmakers face strong headwinds.
Chinese imports are also expected to decline, by roughly 6 mt. However, that amount essentially reflects IHS’ expectations for coal flows from Mongolia, which were offline for roughly two months, and even now are running at roughly 200-300 trucks per day – still well down from the usual 800-900 trucks per day.
Seaborne coking coal imports into China should remain fairly steady, and with coking coal prices falling recently Chinese buying has been relatively solid.
The remainder of the decline is spread relatively evenly between Japan, South Korea, Taiwan, Vietnam, Europe and the Americas.
The challenge that IHS Markit sees now is that despite fairly numerous announcements of production cuts globally, cuts impacting metallurgical coal remain fairly thin in terms of their impacts on 2020 supply. The largest impact to date by far is the loss of Mongolian tonnes into China referenced above.
Beyond that, widespread closures by Coronado of its US operations, a slowdown in Canadian production by Teck, and small reductions to production across a number of Australian suppliers as they move to move COVID-19-resistant business practices have also occurred.
But because of inventories, short expected durations of outages, or outages of low cost mines like Coronado’s Buchanan that will surely return as soon as possible, the net impact of these outages appears to be around 6mt – most of which is the Mongolian tons.
This is nowhere near the amount needed to balance the demand reduction of 24mt expected for this year.
More cuts are needed, which means that prices – despite having fallen quite far already – will need to fall further to force mines offline. As a result, IHS Markit expects that prices for prime hard coking coal will fall further, likely to around $100/t for Q2 and Q3. The United States will likely bear the brunt of these, although it was likely to have lower met coal exports this year anyway. Australia, as the world’s dominant supplier, will also need to export less.
© 2020 IHS Markit®. All rights reserved.
Chinese steel mill buyers are feasting on a glut of raw materials – from coke, coking coal, iron ore to semi-finished steel products – as the rest of the global steel sector falls silent amid widespread lockdowns to combat the spread of COVID-19.
China’s funneling of trillions of yuan in stimulus in its ambition to revive the economy through infrastructure investment has protected its steel industry from the turmoil hurting producers elsewhere.
Chinese producers were ramping up supplies even during the lockdown in February as China leveraged lending to build infrastructure projects, from subway to bridges.
Stocks of product inventory have also seen consecutive declines since mid-March, offering hope that China is on track to be the first post-recovery among the world’s largest economies.
Chinese mills were scooping up resources while their peers were rushing to close plants, reduce production and deal with blunt blows in consumption from sectors including the auto industry and shipbuilding.
A cargo of 18,000 t of coke from Poland was discharged recently at Rizhao port in China’s Shandong province after a 40-day journey, according to three trading sources.
It was followed by another Korean coke cargo of 15,000 mt, unloaded at the same Chinese port, several sources confirmed.
These two cargoes were booked in early February by Chinese end users at around $240-250/t CFR for CSR 65% coke, and compared with domestic coke spot prices of RMB2,050/t (equivalent to $255/t exclusive of 13% tax and port charges) for the same CSR quality at Chinese ports.
“Chinese buyers were taking seaborne cargoes only when seaborne prices were more competitive compared with the domestic market”, one trader source said.
Coke cargoes from Japan, South Korea, Russia and Poland were heard offered into the Chinese market in the past two months, but a steep drop in domestic coke prices in mid-March has closed the gap between the seaborne and domestic market and sapped interest for imported coke.
In the last two months, RMB250/t ($35.70/t) has been shaved off the domestic coke price due to weak demand and squeezed steel margins amid the coronavirus spread.
Polish cargoes from the European Union’s largest coking coal producer JSW SA were offered at $260/t CFR, based on CSR 65% last week, according to one market source.
Domestic prices were reported at around RMB1,800/t ($224.00/t exclusive of 13% tax and port charges) for the same CSR quality.
“China will continue to buy seaborne coke once the price gap opens, and we expect China to become more of a coke import country than export country,” a steel mill source said.
Key economic barometers – from trade, coal consumption to travel congestion – show China is on track for a rebound in industrial activity while most of the rest of the global economy is fighting recession.
The steel sector in China appears to be shielded from the tumbling demand that hit a range of commodities producers.
Producers elsewhere have been less protected, with many being more exposed to the turmoil in the auto market. In South Korea and Japan alone, production at more than 40 auto-making plants – including Hyundai, Honda and GM – has been affected by the virus outbreak.
Steel maker ArcelorMittal was forced to cut steel production at its Italian plants for the next two weeks and delay the restart of blast furnace capacity in Poland.
JFE Steel, Japan’s second biggest steelmaker, said it will shut down crude steel production at its East Japan Works (Keihin) in Kawasaki by March 2024, reducing the number of blast furnaces the steelmaker operates to seven from eight.
Korean producers, including POSCO and Hyundai Steel, are highly exposed to the auto sector and inclined to cut production, slashing their demand for raw material.
Highlighting the steep fall in demand, major Japanese mills were mulling selling their coking coal cargoes that are fixed on term contract to China, a source briefed on the matter said.
Steel makers in Japan also resold between 1.5-2.0 mt of iron ore supplies bought under long term contract to Chinese mills since January.
China reported 150,000 t of coke imports in January-February, despite the virus outbreak, extending the trade inflow that picked up momentum in December 2019.
© 2020 IHS Markit®. All rights reserved.
Low freight rates are providing arbitrage opportunities for Baltic and Arctic ports to ship more Russian thermal coal to India, South Korea and other key Asian markets, a welcome relief for exporters facing dwindling demand in their traditional European markets.
Total exports have been largely steady out of Baltic and Arctic ports, at 4.8 mt in March compared to 5.0 mt in January and 6.4 mt in March 2019, according to IHS Markit’s Commodities at Sea. But the destinations for those shipments have transformed with Asia now more in focus.
March loadings to India via Baltic and Arctic ports are forecast to surge to 0.48 mt, up threefold from January’s 0.14 mt and the 0.15 mt a year ago, according to Commodities at Sea.
For South Korea, shipments are expected to rise to 0.35 mt in March, compared to zero both in January and in March 2019. Shipping data also showed rare shipments, totalling 0.22 mt, in transit to Malaysia and the United Arab Emirates.
This compares to a drop in European shipments, the more traditional market for Russian exports out of the Baltic and Arctic.
Germany showed the biggest change with shipments totalling just 0.18 mt in March, down from 0.77 mt in January and 0.95 mt a year ago. For the Netherlands, the change wasn’t as drastic with shipments totalling 0.98 mt in March, compared to 1.00 mt in January and 1.70 mt in March 2019.
Baltic to west coast India freight on a Panamax is assessed at $20.50/t with Baltic FOB assessed last Friday at $40.50/t making a delivered price of $61.00/t, compared to Russia east coast FOB prices at $62.63/t plus freight of around $8.00/t generating a delivered price of above $70.00/t.
Baltic to South Korea freight on a Panamax is assessed at $21.00/t, generating a delivered price of $61.50/t compared to a delivered price of $66.75/t from the Russian East.
Russian coal producers are also benefiting from a weaker rouble and cheaper oil, which boost domestic currency earnings and help reduce costs.
Most coal producers, other than the United States have benefitted from the comparative strength of the dollar. The Australia and Colombian currencies lost 10-11% of their dollar value in the first quarter of this year and Indonesia and South Africa 5-7%. But Russia is easily the biggest beneficiary and this was most likely because of the rouble’s status as a petrocurrency, even after the recent deal between crude oil producers to limit supplies.
In addition, rail operator RZD has offered discounts to keep rail coal shipments flowing to the Baltic and Arctic, while lines to the eastern ports remain bottlenecked.
© 2020 IHS Markit®. All rights reserved.
Beijing’s ambition to revive an economy crippled by COVID-19 through multiple investment injections may fail to adrenalise a steel sector dealing with its worst glut in years, according to multiple government officials, steel mills, and industrial insiders.
After the 2008 financial crisis, China released an RMB4 trillion ($564bn) stimulus to prop up its economy, but it is now widely believed its response to the current crisis will fall well below that.
Post 2008, “funding went to support a whole new set of projects that were planned and built from scratch. Today these investments are funding projects that were already in the pipeline,” a senior official from the China Iron and Steel Association said.
“… the stimulus plan will help China recover its existing steel demand but will not be able to create additional demand for the market,” the official added.
The expectation of limited support from infrastructure investment could cap China’s crude steel output at last year’s levels of just below 1 bnt, according to the CISA official.
For exporters of metallurgical coal to China, this implies that imports in 2020 will fall somewhere between last year’s 80 mt (including Mongolia), but more likely will be less.
IHS Markit’s current assessment for the year is a 6 mt decline in imports premised on slower GDP growth (IHS Markit forecast at 2%), and government efforts to incentivise buying of domestic coal, which is already falling in price.
Meanwhile, the government has pulled numerous levers to keep its economy growing, including new local government bonds and lowering borrowing costs for domestic enterprises. Beijing also raised tax rebates and cut port fees to stimulate trade, among a host of measures.
At a politburo meeting on 27 March, China also decided to issue rarely used special treasury notes to lift the fiscal ratio in addition to expanding the issuance of its special local government bond vehicle to spur growth.
A total RMB3-5 trillion ($420-710bn) in special local government vehicles is expected to flood into projects this year, up from issuance of RMB2.1 trillion ($296bn) in 2019, but the investment will be significantly limited by the fundraising ability of local governments which are carrying significant debt.
Any hopes for a massive injection flowing through to infrastructure are little more than a phantom, to paraphrase Liang Zhonghua, chief macro-economic analyst at Zhongtai Securities.
He said China’s total investment in the so-called “key construction projects”, part of China’s fixed-asset investments, is expected to fall in 2020, notably in southwestern provinces including Yunnan, Sichuan and Shanxi province.
“The total size of investment for key projects was RMB27.68 trillion ($3.91trn), falling RMB50 billion ($7bn) from RMB27.74 trillion ($3.92trn) in 2019,” Liang said.
The southern province of Yunnan is a good case study. It had planned RMB5 trillion ($710bn) in investment for key construction projects this year, down from planned levels of RMB5.5 trillion ($780bn) in 2019, according to documents from Yunnan's planning department.
But only about RMB440bn ($62bn) of the funding is expected to be spent in 2020, down from RMB512bn ($72bn) in 2019, the document showed.
The record also showed Yunnan only had 89 new infrastructure investment projects that will start construction this year while more than 300 projects were still in the planning phases or will be completed.
“The total number of infrastructure projects will be relatively flat from 2019. Only a couple of provinces will see growth in the number,” Liang said.
Liang said in the research only the pace of approvals was accelerating, but the size and scope of these infrastructure projects were not as big as expected.
Early assessment from IHS Markit senior economist Xu Yating showed growth in China’s infrastructure investment will likely rebound to about 10% year on year in 2020, compared with an average of 3% in the past few years but far below the frenzied growth of 20% in 2008.
© 2020 IHS Markit®. All rights reserved.
A pushback on thermal coal imports has been seen in China as its miners and power sector battle to find a domestic balance now that COVID-19 cases are flatlining in the country.
One of the top state-owned utilities, China Guodian Corporation, has hit pause on coal imports for April and May, including shipments awarded through previous tenders, according to sources in the Chinese power sector.
Guodian’s power plants in coastal provinces had tendered for more than 2.5 mt for April and May delivery.
So far, no force majeure has been declared. Some of the subsidiaries have informed traders that have been awarded shipments in tenders to cancel the shipments or push the laycan to later. Others have informed traders to wait for further notice, saying there are still ongoing internal discussions.
“Loaded shipments with vessel names declared will still be accepted,” a source familiar with the matter said.
“No official document was given on this round of import halt. The internal top-down pressure to support domestic has been there,” a power plant source said.
“Without an official force majeure, we are in a difficult situation to negotiate cargoes with the miner. Providing the current lockdown in India, it’s really difficult to move the cargo elsewhere,” a trader source said.
“Guodian is in a unique position compared with other utilities in that it merged with China’s largest coal producer Shenhua. The move is seen as supporting its own coal business," an international trader said.
Guodian takes around 15 mt/y of seaborne coal, with 10 mt via its own coal purchase division, and 5 mt via Shenhua.
Sources said domestic miners have put significant effort into lobbying policy makers to further cut coal imports.
So far, no other major utilities in China have been seen taking any sort of similar approach to imports.
Struggle to strike balance
China’s industrial activity as well as power consumption have yet to catch up with the rebound in domestic supplies after the majority of the country’s miners restored normal operations.
Worries of a looming glut ahead of the upcoming weak demand season are weighing on domestic prices.
An improvement in coal consumption from power plants has eased in the latest week.
Coal consumption at power plants was at 85% of the average level of the past four years by end of the week, compared with 87% of the average a week ago, according to data from Zhongtai Securities.
China has been getting closer to a full recovery in thermal coal consumption, with daily burn running just 30,000 t behind the 2019 average at the end of March.
Consumption at China’s six major coastal power groups reached 0.62 mt/d on 24 March, up from the low of 0.37 mt/d on 5 February, but slightly lagging the 2019 average of 0.65 mt/d.
This was the first-time consumption has risen above 0.60 mt/d since before the extended Lunar New Year break arising from the coronavirus outbreak.
Amid the ongoing efforts to recover from the damage inflicted by COVID-19, most industries have resumed operation, but with precautions in place.
COVID-19’s impact on thermal coal consumption is considerable. It has taken 59 days from the end of the Lunar New Year for thermal coal burn at major coastal plants to return to above 0.60 mt/d. In 2019, it took only 16 days to hit that level.
More than two months has passed, and the consumption has yet to return to 0.66 mt/d, the level seen prior to the Lunar New Year break, though it is expected to reach that mark soon.
China's first year on year growth in electricity generation since the outbreak was posted on 17 March.
However, despite closing in on a recovery, coal demand is still weak as the slowdown in consumption has left the power plants with sizeable inventories which will still take time to absorb.
Coastal power plants were sitting on enough inventory for 29 days of consumption on 24 March, higher than the 23 days in on the same date last year.
Meanwhile, falling domestic coal prices caused by the rapid recovery in production and coupled with port controls to curb seaborne volumes has diluted the appetite for imports, sources said.
Market sources also noted that the unusually low gas price has encouraged power plants to plan for an increase in gas imports this year.
Some respite emerged for steel mills at the start of April as Mongolia, the largest coking coal exporter to China, reopened three more border crossings for coal supply into China, following several weeks of closure in response to the COVID-19 outbreak.
The country has resumed exports via Shiveekuren, Shiveekhuren, Zamiin-Uud and Khangi, following on from the resumption at Gashuunsukhait last Monday, China’s Xinhua news agency reported.
However, volumes remain significantly below the levels of the same period last year, sources said. Traders expect shipments to remain below 100 cargoes or 10,000 t daily in the near-term.
Prices have been stable with raw coking coal selling at RMB1,000/t ($140/t), and washed material selling at RMB1,300 ($183/t).
“Mongolia has been approving more and more trucking shipments in recent days, but it is hard to say when the export volume will rebound to an average level,” a local trader said.
Mongolian coking coal shipments to China were down 24% on the year in January-February to 2.68 mt, Chinese customs data show, reflecting loss in supplies from the six-week long export ban.
© 2020 IHS Markit®. All rights reserved.
Thermal coal stockpiles at Colombian miners should be sufficient to maintain exports until the end of April, for two of the three majors, even amidst mine idlings and slower production, aimed at reducing the spread of COVID-19.
Minemouth inventories, along with existing stockpiles at the ports, will allow continued loading of ships until around 30 April, according to various customers and shipping agencies.
For now, only CMC (Coal Marketing Company), marketer of 100% of Cerrejón’s coal declared force majeure on 31 March due to lack of coal available to load vessels at Puerto Bolivar, caused by blockades of Cerrejón’s rail line since 26 March by protesters living alongside the railway. It is expected that these blockades will end soon and the force majeure will be lifted, according to Cerrejón and local authorities.
Meanwhile, loadings at Drummond’s port and at Glencore’s Puerto Nuevo (PNSA) port have continued uninterrupted.
Thermal coal inventories at Drummond, Glencore and Cerrejón’s ports were 1.51 mt in the week of 1 April, down 4% from 1.57 mt in the week of 24 March, but up 16% from 1.30 mt almost a month ago on 5 March.
A year ago on 30 March, combined inventories were 3.30 mt.
Minemouth stockpiles are estimated at 1.8 mt at Cerrejón, while Drummond’s minemouth stocks are estimated at 2.2 mt and Glencore’s close to 1.2 mt.
A presidential decree two weeks ago exempted mining activities from the national 19-day quarantine that will end on 13 April, to try to minimize the spread of COVID-19.
However, the big three producers have halted or reduced production in an effort to curb the spread of the virus. Mining operations at Cerrejón were suspended from 23 March and Prodeco’s from 25 March.
Drummond is reducing output and some buses that transport Drummond’s workers to the Pribbenow and Calenturitas mines have been blocked over the past few days by communities living close to the mines, in response to concerns over COVID-19.
At the ports, Cerrejón’s Puerto Bolivar inventories have been at their lowest levels ever between 30,000 and 50,000 t in preparation for a possible strike that did not happen, and as a result, ships were being loaded directly from trains before the blockade of the railway.
Cerrejón’s Sintracarbón union withdrew its petitions on pay and salary on 28 March, the last day it was eligible to go on strike, as both parties did not reach agreement after more than 60 days of negotiations. Meanwhile, Sintracerrejón, the smaller of the two unions that were negotiating with Cerrejón, opted for arbitration instead of strike action. Sintracerrejón’s deadline to take strike action was 26 March.
Cerrejón’s port inventories on 5 March were 0.27 mt, and a year ago on 30 March 2019, inventories were 0.52 mt.
Drummond’s port inventories are currently at 0.61 mt, down from 0.66 mt on 24 March, and down 39% from 1.0 mt one year ago.
Stocks at Puerto Nuevo are currently at 0.85 mt, down from 0.88 mt recorded on 24 March. A year ago, PNSA’s inventories were 1.77 mt.
© 2020 IHS Markit®. All rights reserved.
Falling prices rather than rising restrictions are influencing views on Indonesian supply at the moment, with mining largely uninterrupted at present but cuts likely if values slip further, one top miner has warned.
The country’s top producer, Bumi Resources, has highlighted that a number of Indonesian miners will likely consider supply cuts if the HBA domestic benchmark price falls below $55/t FOB, basis 6,322 kc GAR.
Indonesian coal prices have been under pressure since the COVID-19 outbreak began in China at the start of the year.
The 21-day lockdown in India, along with a shutdown in Malaysia, and a growing number of cases across many other key parts of Asia, including Indonesia itself, are casting more gloom on the horizon.
“The present level of $65-$70/t, though sub-optimal, still works," said Dileep Srivastava, director and corporate secretary at Bumi Resources said, while flagging the potential floor for many producers of $55/t.
The HBA (Indonesian Price Benchmark) for March is $67.08/t FOB, basis 6,322 kc GAR, compared with $66.89/t in February, and dropping on the year from $90.57/t in March 2019.
Bumi maintains that its production is currently continuing at “a normal pace” as Indonesia contends with increasing coronavirus cases, raising concerns over supply disruptions.
In January-February 2020, Bumi’s subsidiaries Arutmin and Kaltim Prima Coal (KPC) jointly sold 14.3 mt, versus 13.1 mt in January-February 2019.
However, Srivastava added that the miner plans to review its plans and “fine tune as appropriate”.
Srivastava said, “There have been no cases on our sites as yet but strict quarantine measures are being exercised. The procurement of masks and rapid test kits are a foremost priority.”
Asked about the possibility of mine closures in Indonesia due to the COVID-19 pandemic, Srivastava replied, “It is difficult to predict but the pandemic is unlikely to be a long-term scenario.”
Bumi has the capacity to produce 90 mt in 2020. Last year, it realised a record coal sales volume of 87.7 mt, up from 80.8 mt in 2018. KPC accounted for 61.8 mt in 2019, while Arutmin sold the remaining volume.
Despite the buoyant sales volume, revenue fell 5% on the year to $4.65bn in 2019 from $4.92bn. Bumi attributed this to weaker coal prices.
The company’s average selling price dropped 13% to $51.70/t in 2019, compared with $59.20/t in the year prior.
Bayan suspends, others steady
Thermal coal supply out of Indonesia on the whole appears to remain largely steady amid concerns of disruption due to the COVID-19 pandemic.
With the exception of Bayan Resources, which has suspended output from one its major concessions, other major miners are said to be producing at stable rates.
The stoppage involves Bayan’s subsidiary mines, Bara Tabang and Fajar Prima Sakti, together with operator, Indonesia Pratama.
“The suspension of operational activity was adopted after taking into account the appeal and direction of the Indonesian government in relation to the COVID-19 pandemic,” Indonesian-listed Bayan said in a statement.
However, a company source stressed that this only affects production activity and deliveries will be fulfilled.
“There is no supply disruption. We have sufficient stocks,” the source said, in reference to its ongoing commitments for the 4,400 kc GAR material produced at Tabang.
It is understood that there have been no cases of COVID-19 within the company but the constant flow of people coming in and out of the mine increases the risk of its workers’ being exposed to the virus.
Tabang produced 80% of Bayan's total output, which hit 32 mt in 2019, and output from the concession was expected to rise this year.
Several other factors could also underpin the halt in mining activity from Tabang. Barging activity for Tabang material has faced increasing challenges due to erratic river levels.
Industry sources also shared that some of Bayan’s cargoes were affected by recent disruptions at Philippines power plants in response to the COVID-19 pandemic.
Elsewhere, several East Kalimantan majors said that stricter movement controls in the region have not placed any pressure on coal production there.
Berau Coal, one of Indonesia’s largest sub-bituminous producers, expects to be unaffected by recent local government restrictions against COVID-19.
Authorities in the Regency of Berau in East Kalimantan have implemented a 14-day curtailment on sea and land routes starting 1 April.
But the miner’s operations will continue to run smoothly, a company source said, confident that local authorities will not hamper industry productivity.
According to a Berau Coal source, the miner began imposing strict health and safety measures back in January, which already slowed its activity.
“We do not expect any impact to deliveries as a result of the recently announced local restrictions,” the source explained.
“The restrictions appear to be targeted at the general public.”
Weak market conditions, which were already felt before the COVID-19 pandemic broke out, encouraged Berau Coal to plan for reduced output on the year.
The miner is expected to produce 29-30 mt in 2020, down from 33 mt in 2019.
“We have ample stocks and continue to maintain a high standard of safety precautions. But we cannot afford to suspend operations,” the source said, adding that to date no COVID-19 cases have surfaced among the local mining community there.
There are no known cases of affected production from other miners from the same regency – among them Berau Bara Energy, Bara Jaya Utama, Supra Bara Energy, Nusantara Berau Coal dan Kaltim Jaya Bara – will be affected by the restrictions.
A source from another East Kalimantan miner said, “If we look at India, Australia – the lockdown applies largely to the general public.
"Essential services continue to run and I believe mining would be considered in that category,” said a source from another large East Kalimantan miner.
© 2020 IHS Markit®. All rights reserved.
The suspension, followed by the limited resumption of South African coal exports, has created havoc in the market, with widespread confusion over how the reopening of the Richards Bay Coal Terminal (RBCT) will impact force majeure clauses declared by exporters.
The initial announcements sent shockwaves through the market, which saw May Richards Bay prices soaring with bids rising to $88-90/t FOB, basis 6,000 kc NAR, last Friday from $63.00/t FOB, same basis, at the start of that week.
Concerns also saw the backwardation surge with a deal for May on Tuesday at $87.50/t FOB, while June changed hands at $69.95/t, on the same day.
RBCT and at least three exporters, understood to be Exxaro Resources, Anglo American and Glencore, received government exemptions last weekend to continue operating as “essential services” during the lockdown, which runs from 27 March through 16 April to halt the spread of COVID-19.
Exxaro and Anglo confirmed they have received exemptions, while Glencore declined to comment.
The three own more than half of RBCT’s shareholdings, with Exxaro at around 10%, Anglo 24% and Glencore at 21% (which includes its joint venture with African Rainbow Minerals). The three, which together exports most of the country’s 6,000 kc NAR material, produced 40 mt of the 72 mt exported out of RBCT last year.
With producers representing more than half of South Africa’s exports now able to operate, it is unclear if that will have a direct impact on force majeure clauses, which protects companies from their contractual obligations due to unforeseeable circumstances.
If force majeure is no longer valid, then it is understood that miners will be forced to either get a government exemption to restart operations themselves or in some cases purchase supplies from those that can export in order to fulfil their contracts.
“It’s a complete mess,” one industry official told IHS Markit.
RBCT restarted operations on Sunday morning, but at significantly reduced levels. Only three out of RBCT’s four loaders were said to be in operation, reducing its capacity to 7,500-9,000 t per hour (0.22 mt/d) from 10,000-12,000 t per hour (0.28 mt/d) normally.
The first sailing occurred on Monday with a total of eight vessels, totaling 0.51 mt, being shipped since the reopening, according to IHS Markit’s shipping tracker Commodities at Sea on Thursday. Vessels were bound for India, Pakistan, Malaysia, Yemen, Mauritius and Sri Lanka.
The uncertainty over RBCT’s future operations and force majeure clauses is creating a lot of volatility in the Richards Bay export market.
IHS Markit’s price for benchmark Richards Bay 6,000 kc NAR has been on an unprecedented roller coaster ride – rising by 12% on Friday, falling by 16% the following session, and then rising again by 13% on Tuesday, only to take back all of those gains over the next two sessions, with the market ending below $70.00/t FOB at the end of the week.
Some miners say their force majeure clauses remain intact since RBCT hasn’t lifted its own force majeure clause.
Even if one producer can export, another will face challenges as a result but that doesn’t mean FM will be lifted, a trader said.
“The Force Majeure will continue until such time RBCT resumes to normal operations,” an Anglo American official told IHS Markit. “With this development at the port, Anglo American’s Coal business in South Africa is currently reviewing processes and considering how best to manage its Force Majeure position with its respective counterparties.”
There is also confusion around the RBCT exemption. Initially it was understood that the port would be free to operate normally, but an industry official said that RBCT only received an exemption to clear the vessels currently on anchor.
“This is a clearing of whatever vessels currently at anchorage. That’s it. The terminal is still under FM,” said another trader.
RBCT applied for two exemptions last week ahead of the lockdown – one to clear its anchored vessels and the second to operate throughout the 21-day lockdown.
After closely updating stakeholders about their operations last Thursday and Saturday, RBCT has largely gone silent. Officials could not be reached for comment despite repeated attempts by phone and email.
“Some shareholders have forced RBCT to perform,” the second trader said. “It is total chaos.”
One industry official said the situation has pitted RBCT shareholders against one another, with some believing they have been unfairly kept in the dark.
“Not everyone was kept in the loop ahead of the lockdown. Both RBCT and those three exporters received their government exemptions at the same time, and this has raised eyebrows,” he said.
Producers who decided to shut operations during the lockdown are now faced with a difficult situation of not only losing business, but also potentially being forced to fulfill their contractual obligations by buying coal from their competitors Glencore, Anglo and Exxaro.
South Africa’s largest thermal coal exporter South32, along with Canyon Coal and Kangra Coal, are among the producers that have placed their export coal mines into care and maintenance last week ahead of the nationwide lockdown. The three companies together represent around 25% of RBCT’s shareholders.
South32 declined to comment about their plans, while Canyon and Kangra Coal could not immediately be reached for comment.
Even if they receive government exemptions now, they could find it difficult, if not impossible, to get hundreds of workers to leave their homes and return to the mines amid the nationwide lockdown.
The National Union of Mineworkers this week put out a statement saying it was “deeply concerned and worried” about mining companies operating during the lockdown.
“The whole world is grappling with the coronavirus crisis while some mining companies are busy making profits at the expense of poor mineworkers,” the union said.
South Africa’s government has been sharply criticized by the coal industry for its handling of the lockdown.
“The Department of Transport recognizes that there have been numerous instructions distributed by various entities, causing confusion amongst various entities, service providers and shipping companies,” the Maritime Safety Authority said in a regulatory notice issued on Tuesday.
The regulator added in the notice that it hoped to clarify that all ports would be operating during the lockdown.
“Government has now decided that in the interest of ensuring a functional supply chain across all ports, that all cargoes will be accepted for loading and off-loading,” the South African Maritime Safety Authority said in a notice dated 31 March.
“All South African ports remain open for port operations. Cargo operations will continue in all ports,” it said.
But exactly how much coal will be coming out of South Africa remains to be seen.
While the supply-side has reeled under the impact of COVID-19, the demand side has taken a worse beating.
Demand from India and Pakistan, the two largest markets for South African coal, have imploded.
India’s sponge iron makers which account for around a third of South African exports have largely shut down, while the few that remain open are operating at massively reduced capacity.
The same is true in Pakistan, where a similar lockdown to halt the spread of COVID-19 has left little demand for foreign coal.
“The port is still open but imports are very low. Cement and other production in Pakistan is near zero so demand for coal is the same,” a trader said.
With these demand centres under lockdown for about the same time as South Africa, some market watchers expect the two forces to more or less cancel each other out.
IHS Markit analysts forecast thermal coal imports to decline by around 65 mt this year due to the COVID-19 pandemic. Last year, the global seaborne thermal market totaled 1.034 bnt.
“With COVID-19, things are changing so rapidly,” said a trader with a major South African producer. “Right now, being in the market is like playing with fire.”
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The COVID-19 pandemic could slash global coal import demand by more than 80 mt this year, while the supply picture took a hit on Friday by the temporary loss of South African exports as the country started its 21-day lockdown.
An IHS Markit analysis forecast thermal coal imports to decline by around 65 mt, while intake of metallurgical material could shrink by 14-15 mt this year.
The key factors driving this drop are the oversupplies in the domestic Chinese market, coupled with the expectation of a significant fall in intake from South Asia and South East Asia, said James Stevenson, research and analysis director for coal at IHS Markit.
Chinese imports are expected to fall around 20 mt, while India could see a 15 mt drop. European imports will likely fall around 17 mt, though a large decline had already been expected before the COVID-19 outbreak.
In 2019, the global seaborne thermal market totalled 1.034 bnt versus demand of 1.028 bnt, according to IHS Markit data.
Recent curtailments from South Africa, Colombia, and the United States are a start, but larger reductions will be needed on the supply side to balance the market, Stevenson noted.
South Africa’s 21-day lockdown begins
South Africans woke up to a complete lockdown on Friday, the first day of a three-week period where only essential services can operate as the country battles to stop the spread of COVID-19.
Richards Bay Coal Terminal (RBCT), which exported 72 mt last year, has been forced to shut its operations during the lockdown, potentially removing as much as 4.2 mt from the seaborne market over the 21-day period.
RBCT has asked the government for an exemption that would allow the country’s largest coal export terminal to resume operating, but it isn’t clear when a decision will be made on its request.
Rail shipments to RBCT have stopped for now, industry sources said. A Transnet source said RBCT railings would not resume until exporters are granted government exemptions for shipments to restart during the lockdown, which lasts through 16 April.
At least one miner, Anglo American, said on Friday it would continue producing albeit at a 50-70% reduction. It anticipates the impact to its thermal exports will be 1.5-2.0 mt for the year. Anglo exported 17.80 mt last year from its South African mines.
The miner didn’t say what it would do with its export coal during the lockdown. It could stockpile the material at its mines or potentially rail it to RBCT.
If exporters are granted the exemptions to rail to RBCT, but the terminal remains closed, then stockpiles could surge from their current 3.65 mt. The terminal has a capacity to hold more than 8 mt.
Transnet railed 71 mt to RBCT last year, which theoretically could mean an extra 4 mt being stockpiled at RBCT during the three-week lockdown. But mines and rail services are expected to be drastically reduced, so a small fraction of that volume is much more likely.
Also, it isn’t clear how the coal would be stockpiled at RBCT if the terminal is shut and there are no workers.
“Transnet will continue to transport coal as long as there is demand and availability of the coal railway line,” the rail operator said in a statement on Friday.
The rail operator will also continue transporting coal to Eskom power stations since those mines can operate during the lockdown.
Despite the loss of South African supplies, Indonesian coal producers were finding little demand for their coal.
“Even with reduced supply from South Africa, Colombia, and even domestically in China and India, there is little support for prices as demand is so weak,” a source from a producer of Indonesian sub-bituminous coal said.
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Both Glencore and Drummond are joining Cerrejón in curtailing and suspending production from their Colombian mines in repose to the COVID-19 threat.
Glencore announced this afternoon that it will suspend mining starting 25 March at its Prodeco thermal coal operations.
“Prodeco will transition to care and maintenance (C&M) on 24 and 25 March 2020,” according to the company’s statement. “The port will continue to operate until existing stocks are depleted.”
Prodeco added: “Although the Presidential decree has exempted mining from the national 19 day quarantine to try and minimize the spread of COVID-19, growing community tensions and restrictions on logistics have made it difficult to ensure the continued and safe operation of the mines, and have put our host communities at risk of violence.”
Drummond is putting a contingency plan in place to reduce mining as it assesses the health and safety implications of the virus.
It is understood that some buses that transport workers have been blocked the over the last few days by communities living close to Pribbenow and Calenturitas mines in response to concerns over COVID-19.
As reported earlier today, Cerrejón was the first of the Colombian majors to announce that it was curtailing production. At the time it was not known if it was a reduction or suspension, but it now seems that the miner is suspending production.
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Swiss-based commodities producer and trader Glencore warned that it is assessing its Prodeco thermal coal operations in Colombia and would exit the country by 2035, in light of depleting reserves and hefty writedowns.
“We continue assessing Prodeco. If they continue losing cash, and if we don’t see a turnaround in coal prices in Europe, then we have to make a strong decision and see what we do there,” Glencore CEO Ivan Glasenberg said in a conference call after delivering its 2019 results on Tuesday.
The giant Cerrejón mine in Colombia, in which Glencore holds a one-third stake with BHP and Anglo American, "makes money, it produces 30 mt and its cash costs are a bit lower. Its contracts are not only into Europe," Glasenberg said.
However, Glencore will not be producing coal in Colombia after 2035, in line with the "natural depletion" of its resource base in the country, the company said.
Glencore's concession in La Guajira department expires in 2034, while those in Cesar department run out in 2035 and those in La Jagua extend only to 2031, according to Colombian sources.
“South Africa will also decrease but Australia has high quality reserves and we will keep producing there,” Glasenberg said.
However, he added that for the time being: “The coal business continues to perform well right now and continues to stay in operation.”
Glencore booked $2.84bn in impairment charges over the year, of which its Colombian coal assets accounted for around $1bn.
“The writedowns are post tax and Colombian coal is $1bn of that, half across Cerrejón and half across Prodeco. That coal is primarily getting into Europe, pricing at API2 where it's competing with low gas prices. The economics are not adding up. Colombian are not long-life assets like Australia and South Africa,” Glencore’s Chief Financial Officer Steve Kalmin explained.
The Prodeco operation was impaired by $514m, along with an inventory write down of $41m to its estimated recoverable amount of $778m, the company noted in its preliminary results.
Prodeco’s production was 15.6 mt last year, 3.9 mt higher than 2018, reflecting additional mine development. Glencore’s share of Cerrejón’s production was 8.6 mt in 2019, 1.6 mt lower than in 2018, primarily reflecting constraints on production to limit dust emissions, the company said.
The company said it will maintain its 150 mt cap on coal production. Total coal output guidance for 2020 remains at 139 mt, plus or minus 4 mt. Overall production grew 8% in 2019 to 139.5 mt, mainly reflecting the gains from Hunter Valley Operations (HVO), acquired in May 2018, and Hail Creek, bought in August 2018.
Australian thermal and semi-soft output stood at 79.2 mt, a 9% increase from 2018, buoyed by HVO and Hail Creek.
Australian coking coal production reached 9.2 mt in 2019, up 23% or 1.7 mt.
Glencore's coking coal assets in Australia saw earnings before interest, tax, depreciation and amortization (EBITDA) increase 18% to $793m in 2019.
The company’s total EBITDA, however, fell 26% to $11.6bn on lower prices for its main commodities – copper, thermal coal and zinc. Revenue from its own coal production was down 10% on the year at $10.1bn. The company's trading arm recorded adjusted EBITDA of $2.4bn, flat year on year.
However, the writedowns on its coal, oil and copper assets contributed to the company posting a net loss of $404m last year, against a profit of 3.41bn in 2018. Glencore last reported a loss back in 2015.
The company is monitoring the impact of coronavirus outbreak in China and said it was too early to assess the exact impact. There had been no cancellation of coal shipments or delays in letter of credit, it said.
In terms of coal consumption in the Atlantic Basin Glasenberg said, “The amount of coal being consumed in the Atlantic is decreasing, right now, seaborne coal demand is about 70 mt and I don’t see a big recovery and it will continue to decrease.”
“Global seaborne thermal coal demand was characterised by continuation of the strong growth trend in Pacific markets and demand decline in the Atlantic, principally Europe," the company said in its filing.
"This trend was accelerated by surplus global LNG supply, resulting in enhanced competition from low spot gas prices in European markets.”
Glasenberg spoke about the change of guard at the company during the conference call, noting it was working on bringing through a fourth generation of leaders.
“There will be a few senior changes coming. As I have said, once the new generation is in place and ready to move on, it will also be time for me to move on.”
He added the board was looking at various individuals in the group for the leadership position.
In the past analysts have suggested leading contenders to succeed to Glasenberg are Gary Nagle, head of coal assets; Kenny Ives, head of nickel operations and Nico Paraskevas head of the copper business.
Glasenberg announced his plan to retire in 2018.
© 2020 IHS Markit®. All rights reserved.
The impact of the coronavirus epidemic on domestic coal production in China, coupled with weak freight markets, have lifted demand for Colombian thermal coal in China and India in the past two weeks.
Colombian prices are currently $48.00-50.00/t FOB, basis 6,000 kc NAR, with delivered prices into China at $69.00-71.00/t, according to market sources.
That compares with last week’s IHS Markit assessment of $81.31/t CFR South China for 6,000 kc NAR material, typically sourced from Australia. Buyers are demanding hefty discounts for Colombia in part to reflect the longer voyage times and ensuing price risk. It takes 65 days for a ship to steam from Colombia to China, versus 20 days from Newcastle to China.
Colombian exporters are understood to have sold at least three or four cargoes into China directly and at least two others through traders, potentially amounting to just short of 1 mt in the first six weeks of 2020, sources close to the matter said.
Colombian thermal coal exports to China rose to 1.82 mt last year, from 0.33 mt in 2018, while shipments to India increased to 1.20 mt in 2019, from 0.35 mt in 2018.
© 2020 IHS Markit®. All rights reserved.
Chinese buyers are showing a heightened interest in thermal coal imports in the wake of the coronavirus outbreak - with domestic supply tight and rising in price, while transportation remains a challenge too.
Almost half of China's thermal coal mines remain closed, the National Development and Reform Commission (NDRC) stated in a press conference on Tuesday, citing a figure of 57.8% as having reopened.
Most of the private thermal coal mines across major producing regions are still shuttered as of Wednesday, mining sources said.
The supply-demand picture in China looks set to be complicated further in the coming days with snow forecast for vast parts of the north by Friday, likely stoking coal consumption.
Nonetheless, NDRC also urged companies in key sectors - including energy, pharmaceutical, and logistics - to reopen and vowed more initiatives for companies facing difficulties in buying raw materials.
These companies have rising domestic thermal coal prices to contend with, as 5,500 kc NAR material was priced at RMB573/t ($82.27/t) FOB Qinhuangdao (QHD) at the end of last week, up RMB10/t ($1.29/t) on the week, according to figures from the China Coal Transportation and Distribution Authority (CCTD).
Transactions for 5,000 kc NAR material edged up by the same amount to RMB511/t ($72.86/t) FOB, rising RMB9/t ($1.14/t).
By comparison, imports were looking attractive, with Australian high-ash material offered at $55.50-58.00/t FOB for March loading Capes, while Indonesian low-rank was offered at $38.00/t FOB for 4,200 kc GAR on Tuesday for a March loading Panamax.
“Inland power plants have relative lower stocks compared with their coastal power plant peers," said one domestic coal trader.
"As they ramp up purchases, they have pushed up domestic spot prices at mines. Spot prices at ports have risen at a slower pace than inland coal mines because of limited demand from coastal plants,” they added.
Consumption by the major coastal power generators stood at 0.37 mt/d on Tuesday, flat to the previous day. Meanwhile, the total inventory at major coastal power stations was 16.88 mt as of yesterday, higher than the 16.57 mt reported two days earlier, and enough for 45 days of consumption.
Despite the growing allure of imports for some, Beijing has given no indication to Chinese buyers that it will stand down from the vigilance over volumes from overseas which it has exerted in the last two years.
In fact, one southern China based power plant manager said they have been repeatedly warned that imports are still being heavily managed, with certain port officials said to have directed them to get clearance elsewhere.
The country has been using various curbs to tame growth in coal imports since 2017, as part of its anti-pollution campaign and partially to protect domestic miners’ interests.
Most Chinese ports have banned non-local companies from seeking clearance approvals, a measure to help the government keep track of real import volumes, sources said.
Coking coal shows resilience
Signs were emerging that the international coking coal market may be able to weather some of the coronavirus storm.
“All March shipping schedules to Chinese buyers have been confirmed with no cancellations. In fact, we have received enquiries for additional coal from end-users in China,” a coking coal miner from Australia said.
However, China's steel producers are still struggling with record inventory of products.
“Steel products inventory is very high and sales still very poor," a source at one Chinese steel mill said.
I am still worried about the impact of the coronavirus," they added. "We should be careful on raw materials purchasing."
Many of China's coking coal mines, most of which are in Shanxi province, remain closed.
China’s top metallurgical coal miner Shanxi Coking Coal Group had 20 coal mines out of its 107 mines operating as of 10 February, while another 58 remain shut.
Details of the other domestic mines that have reopened can be found in China Coal Daily.
Further coverage of the coking coal and steel situation in China can be found in IHS Markit's dedicated daily metallurgical coal publication Inside Coal.
© 2020 IHS Markit®. All rights reserved.
South African coal producers are pushing more supplies into the export market to take advantage of stronger prices, which has resulted in a squeeze in domestic supply.
For months, benchmark Richards Bay 6,000 kc NAR prices have stayed well above $75/t FOB, a key threshold that makes the export market lucrative enough to swing supplies from the two main domestic demand centres – Eskom and the inland industrial market.
The longevity of the Richards Bay rally is giving market players the confidence to divert supplies from domestic markets and book longer term export contracts, traders told IHS Markit.
Last week, Richards Bay 5,850 kc NAR min prices averaged $88.97/t FOB, basis 6,000 kc NAR, up 1% from the previous week and the highest weekly average since the one-year high of $92.36/t FOB reached in mid-January.
Traders said the shift in the markets is most evident for 4,800 kc NAR material.
South Africa’s struggling power utility Eskom has been the main buyer of the lower c.v. material for most of last year, but that has changed since the start of 2020.
Eskom, which buys nearly half of South Africa’s 250 mt annual production, has already secured most of its coal for FY2020/2021, providing Eskom-tied suppliers an opportunity to feed more supplies into the export market. Traders said some producers of 4,800 kc NAR were either blending the lower c.v. material with 5,700 kc NAR to produce 5,500 kc NAR coal to sell to Indian sponge iron buyers, or selling the unblended coal to meet their take-or-pay requirements.
“Established coal producers will continue to play Eskom off against other markets and make up their non-Eskom commitments through coal buy-ins from juniors and small scale miners,” said Waheed Sulaiman, managing director of Octagon Minerals, at IHS Markit’s Southern African Coal Conference in Cape Town.
Sulaiman expected Eskom prices to remain attractive this year but would not likely spike more than 10% as in FY2018/19.
Traders were also awaiting producers to publish their inland prices for the year. Glencore is expected to release its inland prices over the next few weeks, providing the benchmark for other producers to price their coal for the year.
Traders said they expected domestic Grade A generic peas to rise to around ZAR1,200/t this year, up 9% from last year.
Inland prices typically rise every year but declined for the first time in recent memory last year after major producers diverted their export supplies and caused an oversupplied market.
© 2020 IHS Markit®. All rights reserved.
The drivers that helped push benchmark Richards Bay prices to their highest level in almost a year are starting to ease, as Indian coal output recovers and lower c.v. South African availability improves.
However, market participants note that the recent rally has significantly overshot on the upside beyond what’s reflective of market fundamentals alone and the short squeeze driven by the supply side could be pulled back and prices are poised for a correction.
Benchmark 5,850 kc NAR min prices have been flat for the past two weeks, hovering above $82.00/t FOB, basis 6,000 kc NAR. In the last full week of November, the Richards Bay FOB marker averaged $86.58/t FOB, same basis.
At the same time, discounts for lower quality South African coals have widened, also suggesting an easing from the end of last month where a bid of $100.00/t FOB for Richards Bay 5,850 kc NAR min loading in December on the globalCOAL screen could not find a willing seller.
The easing in tightness is most apparent in the 4,800 kc NAR space, where discounts have widened to around $17/t to API4 paper in the past few days from $15/t.
A combination of mining issues in India and South Africa and a push by Indian sponge iron makers to secure tonnes of the specific coal they need helped drive Richards Bay prices to close to $100/t FOB.
But the bull run, coupled with better domestic availability, have deterred Indian buyers from booking fresh cargoes since the start of the month.
Expectations are now starting to emerge that the 47% rally since the start of October and the end of last week, is running out of steam and prices will drift lower.
The backwardation seen between December and January jumped to around $18/t at the end of November.
Since December rolled out on 29 November, the backwardation between January and February has wobbled around $6-8/t, enough to push some Indian buyers to renegotiate their committed purchases or at the very least push back deliveries.
“In December, a lot of coal was deferred either to January or sold back to the producer at ’mark-to-market’ losses,” said one trader.
He added that at least four Capes of South African booked for the sponge iron market have been renegotiated. These may have been offset by a pair of Colombian cargoes intended for captive power plants.
Other Indian buyers are eyeing their inventories bought at higher prices with an increasing sense of unease; fearful of the prospect that they may get caught out with expensive stocks as the rally dissipates.
Stock and sale trader inventories of all types and origins of coal at 18 major Indian ports rose to 15.09 mt in early December from 14.79 mt on 28 November, when prices peaked.
Several Indian traders have booked South African 5,500 kc NAR coal for arrival in December and January at the eastern coast ports of Dhamra, Paradip, Vizag, Gangavaram and Krishnapatnam.
And while the coal rolls in, the factors which conspired to push the market up are unwinding.
Market sources say with Richards Bay prices high, coal users in the Gulf region ex-India have secured alternatives, chiefly Russian coals with close to 0.5 mt of Russian coal pricing into the region in the last month.
“The Russian coals have gone to countries such as Pakistan, UAE, Kuwait, Ethiopia and a few other places, where it is displacing (5,850 kc NAR min Richards Bay FOB products), not as a direct substitute but as a blend with (5,700 kc NAR min Richards Bay FOB products) to produce a 5,800 kc NAR typical, 16% max ash kind of product,” the trader source said.
Some in the market estimate so far at least around 1.0-1.5 mt of Richards Bay coal has been either displaced or replaced by Colombian, Russian or Australian cargoes for Indian industrial users outside the sponge iron sector.
For sponge iron producers, the post-monsoon Richards Bay rally has been a double whammy. The fall in domestic supply due to the prolonged rains has made them absorb higher raw material costs, while downstream, prices for steel products have remained under pressure.
“Demand is just not there, and industries in India who consume 50-60% of South African coal, the growth is negative, and steel plants are not doing that great,” an Indian trader said.
The Indian sponge iron makers, who were the drivers of the spike in South African coal demand, and other end-users are now on the sidelines and hoping to take advantage of the backwardated market.
“Many of the buyers are looking at December API4 and the backwardation in January and have not bought anything in December,” the Indian trader added. He said he expected to see an uptick in enquiries for South African 5,500 kc and 4,800 kc NAR min FOB material in January.
However, others worried that the backwardation might persist which could deter buying into the first quarter.
© 2019 IHS Markit®. All rights reserved.
Beijing continues to keep the market guessing on an expected reset of its import controls at the start of 2020.
Many are betting on the curbs being dropped to accommodate a growing backlog at ports from the first of the month.
A pick-up in utility tenders and buying by steels mills, along with suggestions several China-bound cargoes are on the water is fuelling confidence that the restrictions will be rolled back.
However, not all are convinced, and there are plenty prepared to take a wait-and-see approach while the policy vacuum remains.
“We have received no word from ports at this point regarding whether the controls will be lifted," said a source at one Chinese steel mill.
"But no one is worried. Many vessels are on their way to China now."
China had wanted to keep 2019 imports at no more than 281 mt, flat to the previous year, it was long understood.
Various restrictions have been put in place across Chinese ports since the end of the summer in an effort to turn back the tide of growing imports.
These measures were insufficient though, with China overshooting its target by the end of November, hitting 299.3 mt for the first 11 months of the year.
Nonetheless, the curbs have slowed import volumes, with the November tonnage, at 20.8 mt, being the lowest monthly total since February, which was impacted by the Lunar New Year.
This is a trend which reflects the tail end of last year, when import controls were swiftly escalated as Beijing realised its 2018 target was slipping from its grasp.
Amid these measures, imports ground to a crawl last December, slumping to 10.23 mt, which was half of the November figure, and was the lowest monthly volume in nearly eight years. Many are anticipating a repeat this December.
Beijing hit pause on its controls as 2019 got underway, opening the floodgates for a huge backlog, which resulted in January soaring to 33.50 mt, the highest monthly level in five years. Again, many envisage this scenario being repeated in January 2020, if China does indeed drop its curbs.
“The decline in November reflected clearance delays for many cargoes. These cargoes are likely to be pushed into next year for approvals," said a utility source.
Another trading source said a slew of utilities are ramping up their tenders ahead of the Lunar New Year in January, noting that Huaneng, Guodian and Guangdong Energy issued tenders this week.
“The January volume will be disrupted by the week-long Lunar New Year, which could push the February volume even higher,” another trader noted.
China to avoid "blanket ban"
Some utility sources believe Beijing might keep the “quota scheme” rolling into 2020, and could cap overall imports for the year at 300 mt.
Beijing wants to “control imports, but avoid a blanket ban,” sources said, citing discussions between top officials from the National Development and Reform Committee (NDRC) and the powerful National Coal Industry Association at a meeting in early December.
“The NDRC said there will be a standard for how the coal import curbs would be carried out,” a source with direct knowledge of the meeting said.
“China has reached a tipping point,” another top government think-tank researcher said, referencing its efforts to reduce imports after total arrivals breached the target this year.
“The government is highly likely to take a hard stance on imports and pressure end-users to reduce seaborne material in their energy mix,” he said.
But with seaborne thermal and coking coal material increasingly offering better value than domestic products, there is economic pressure to increase imports.
“Power plants have a stronger interest in using low-rank Indonesian supplies," one utility source said.
"Blending low-rank Indonesian supplies helps lower fuel costs," a trader added. "Many have upgraded their boilers so that they can feed the blended grade."
Nonetheless, the cloud of uncertainty may yet linger over China's imports for several months yet.
There are some who believe a clearer message on import policies will not come until the annual parliament meeting, which is set to open on 5 March.
© 2019 IHS Markit®. All rights reserved.
An increase in petroleum coke supplies in the Mediterranean and Northwest Europe will see inter-fuel competition intensify in industrial markets, according to trading sources.
Up to 2.10 mt/y of thermal coal could be displaced, as refinery projects adding up to 1.70 mt/y of extra petroleum coke comes to the market in 2020.
Starting in the Mediterranean, Egyptian Refining Company (ERC) started regularly supplying the local cement market with a sulphur content of 4.5-6.0% in the third quarter and at full capacity it is expected to produce about 0.40 mt/y.
This is in addition to the existing refinery, Midor, which produces a maximum of 0.40 mt/y. It issues a supply tender to the domestic market in April each year.
Egypt has been one of the biggest markets for United States Illinois Basin thermal coal, with over 2 mt exported in 2019 for its domestic cement industry.
However, domestic cement producers are expected to switch to petroleum coke in 2020, probably after the first quarter, as there is enough on the ground in storage to cover this period.
In Turkey, SOCAR’s Star refinery is expected to reach full output in 2020 of nearly 0.70 mt. It is already ramping up production and has started offering cargoes to the local market. It is producing a mid-sulphur (4-5%) quality petcoke, which has been bought by local cement producers and has a slated maximum output of 0.70 mt.
This is the second major coker start-up in Turkey after Tupras started production in 2016.
The start-up of Tupras has already dented petcoke imports into Turkey which have fallen to 2.40 mt in the first ten months of 2019, compared to 4.10 mt in the same period of 2018.
It is partly driven by Tupras increasing supply to the refinery’s nameplate capacity, SOCAR’s expansion and a collapse in cement output. Petcoke from Turkey has also been exported to Egypt where more supply is coming to the market.
In Poland, the Grupas Lotto refinery started up a new coker this quarter and material is already being marketed in Turkey and Egypt. It will produce up to 0.60 mt/y, with sulphur quality ranging between 4.5-6.0%.
Hedged coal expires
The Mediterranean market is also likely to see its supply of US Illinois Basin coal dry up, as hedged coal deals agreed in 2018 have mostly expired and opportunities to lock in prices are limited. Suppliers are unable and unwilling to lock-in price risk when DES ARA prices are below the cost of production.
One of the main suppliers of Illinois Basin coal, Murray Energy is going through financial restructuring under Chapter 11 and asked the bankruptcy court to repudiate its take-or-pay contract with Convent Marine Terminal, as it is simply not profitable to ship Illinois Basin coal at current spot prices.
The expected lack of US Illinois Basin coal on the market could provide limited opportunities for Russian thermal coal, depending on the price. Cement producers in Turkey blend petroleum coke with low sulphur Russian coal, and it is possible that Egyptian buyers will do the same.
© 2019 IHS Markit®. All rights reserved.
The Bangladeshi government has cut value-added tax (VAT) on imported thermal coal to 5% from 15% with effect from this week until June 2025.
The move is aimed at encouraging coal-based generation and lowering power tariffs.
In a circular, the country’s National Board of Revenue (NBR) said to qualify for the reduced rate, coal traders should submit a letter to customs declaring the imported coal will be used only for power generation.
Importers of coal used for other purposes are expected to pay the regular VAT rate of 15%, a local source in possession of the notice told IHS Markit.
In addition to VAT, imported fuels attract two further taxes of 5% each. However there is talk that these too may be waived for thermal coal.
The exact impact of the tax cut on power tariffs could not be immediately confirmed by IHS Markit. Fuel costs make up nearly 65% of total electricity production costs, a separate source said.
The government’s move comes at a time when the first 0.66 GW unit of the 1.32 GW coal-fired Payra power station in the south of the country is expected to start commercial operations by early next year.
Indonesian miner Bayan entered into a ten-year supply agreement with the Payra power station earlier this year. In the first three years, Bayan plans to supply 3 mt/y of 5,000 kc GAR material to the plant. In the subsequent seven years, the miner will supply 2 mt/y of 4,400 kc GAR material to the plant.
The power station is designed to consume around 4 mt/y of imports once both units are up and running at maximum capacity.
The tax cut has been welcomed by coal producers in Indonesia – a market that already has a foothold in Bangladesh and offers a freight advantage to end-users in Asia. Several producers interpreted news of the regulation as a strong signal of urgent coal demand in Bangladesh.
“This has been a long time in the making and is definitely a good sign for Indonesian coal producers,” an East Kalimantan miner said.
Another low c.v. Indonesian producer said, “This is particularly good news for Indonesian coal exporters with material that has a c.v. of 5,800 kc GAR or higher. Bangladesh can absorb higher ash coal.”
The government plans to build 20 GW of coal-fired electricity capacity by 2030.
Bangladesh is expected to import just over 4 mt of thermal coal this year and with the addition of new coal plants imports are expected to rise to close to nearly 10 mt by 2022.
The majority of the coal imports are sourced from Indonesia. The country began importing coal in 2013, and since then, volumes have grown exponentially.
© 2019 IHS Markit®. All rights reserved.
Substantial volumes of low c.v. South African coal supplies currently dedicated to power utility Eskom could be diverted to the export market next year, if the government continues to demand the industry lower its domestic prices.
Several Eskom supply contracts, including those with Glencore, South32, and Exxaro, are either expiring next year or being renegotiated.
Industry officials told IHS Markit that any new Eskom supply contract will likely be significantly less attractive for companies given the current political environment. And the likely result will be that producers, who are beholden to shareholders and not the South African government, will turn their backs on Eskom and instead sell more of their supplies overseas.
“We could see a really tense situation where Eskom struggles to find supplies again and Richards Bay is exporting record volumes,” said a senior industry official.
Under growing pressure from parliamentary members, President Cyril Ramaphosa’s administration has stepped up its campaign to get producers to lower their prices for coal sold to heavily indebted Eskom.
Government officials believe the state monopoly, which buys roughly half of South Africa’s 250 mt/y output, is paying way too much for its coal, typically 4,800 kc NAR material or lower.
The industry has so far refused to budge, saying the utility’s troubles are much more complex and varied than just the price of coal.
“We’ve got to lower the price of coal,” Public Enterprises Minister Pravin Gordhan told parliamentary members during a question and answer session this week.
“We’ve talked to the coal suppliers. We need to get them to understand that they need to share the burden in making sacrifices, so that Eskom is in a financially more stable position than it finds itself in this particular time.”
Eskom’s top coal suppliers are Exxaro Resources, Seriti Resources, Glencore, African Exploration Mining, Universal Coal and South32 (which is in the middle of selling its South African thermal coal assets to Seriti).
An analysis of Eskom’s contracts found that nine suppliers earned between 30-49% profit margins, four suppliers pocketed 50-100% margin, and seven suppliers earned at least 100% margins, Gordhan told parliament.
“These are excessive profits and what we want is a fair return for the private sector and a fair price to Eskom, so that all of us can get the best price for electricity at the end of the day,” the minister said.
A parliamentary member said Eskom could be saving ZAR4.5m/day ($0.3m), ZAR10bn ($680m) in six years if it had followed the national energy regulator’s recommend coal price of ZAR350/t ($24).
Some contract prices are substantially higher than this, especially those signed in the last year or two when Eskom found itself scrambling for supplies to keep the lights on.
For example, industry sources said Glencore has entered contracts with Eskom selling 4,500 kc NAR coal for ZAR400/t ($27), 4,800 kc NAR at ZAR500-600/t ($34-41), and 6,000 kc NAR material for ZAR980/t ($67).
These contracts were signed in November 2018 and are due to expire in April and October 2020.
A Glencore spokesman did not answer emailed questions for the story.
“Eskom acknowledges that certain coal contracts are deemed to be excessively priced. Contracts that are deemed to be expensive will be renegotiated,” Gordhan said.
New Eskom contracts could be based on a new indices, which are being pushed by the government to provide better transparency on pricing.
“We are working on indexing the different qualities of coal so that everyone makes a fair return on the one hand but also we don’t exploit the situation as far as the costs incurred by Eskom,” Gordhan said.
If producers do turn their backs on Eskom, they will likely blend their 4,800 kc NAR and lower material with 5,700 kc NAR to produce 5,500 kc NAR coal, which is then sold on mainly to India’s sponge iron industry.
© 2019 IHS Markit®. All rights reserved.
Low c.v. Richards Bay thermal coal markets are rallying alongside the higher c.v. benchmark because Indian sponge iron and industrial buyers are not yet incentivised to buy Australian or other cheaper alternatives as they did last year.
Richards Bay benchmark prices have surged more than 70% over the last three months to trade at an 11-month high of $95.50/t FOB, basis 6,000 kc NAR, this week for a December cargo, due to tightness in the market for that specific quality.
This rally has happened in conjunction with the lower c.v. markets, including the much larger Richards Bay 5,500 kc NAR FOB market, with the discount to the API4 staying static, spurred in part by flooding of central Indian mines, which has impacted domestic supply.
Last week, a 50,000 t December cargo of Richards Bay 5,500 kc NAR material traded at $60.10/t FOB, basis 5,500 kc NAR, (equivalent to $65.56/t FOB, basis 6,000 kc NAR), which was a $10/t discount to December API4 paper at the time.
Also, an Indian sponge iron maker was understood to have recently purchased a 100,000 t cargo of Richards Bay 5,500 kc NAR material at an $8-9/t discount to the API4, which at the time was around $73-74/t FOB, basis 6,000 kc NAR. The buyer expects to buy another cargo for January loading at a similar discount.
The API4 paper discount for Richards Bay 5,500 kc NAR material has remained relatively steady at between $8-10/t since the rally began in late August.
When prices rose 23% over a four-month period from April 2018 to a 6-1/2-year high of $109.26/t FOB in July of that year, the API4 discount was maintained at $6-9/t, until the differential to Newcastle FOB 5,500 kc NAR blew out to $19/t in early August.
This stimulated the purchase of Australian coal by Indian buyers, and while this was predominantly by industrials, as opposed to sponge iron manufacturers, this seemed to be the trigger which saw the API4 discount for South African 5,500 kc NAR FOB material blow out from July to a record $25/t by December. Due to this, South African and Australian 5,500 kc NAR FOB prices came back to relative parity.
Today, the differential is less than half the 2018 peak at around $10/t, with Australian FOB 5,500 kc NAR priced last week at $50.13/t FOB and the Richards Bay equivalent at $59.98/t FOB.
One of the major reasons for the surge in South African prices has been a significant increase in demand from the Indian sponge iron industry due to the harsher than normal monsoon, which has seen domestic production take a hit. How long this demand will continue will depend on how long it will take for domestic production to get back on track.
The reason the South African/Australian differential will need to increase notably to have an impact on the API4 discount is due to the fact that the Newcastle material has a lower fixed carbon (FC) and higher volatile matter (vols) that both significantly reduce productivity in its sponge iron application.
South African 5,500 kc NAR coal typically has 52-53% fixed carbon (FC), while its Australian counterpart from Newcastle has around 47-48% FC. Higher c.v. coals generally have higher FC, with Richards Bay 6,000 kc NAR material at around 58%, but the benefits are usually outweighed by the higher price for this product with the majority of Indian sponge iron makers.
South African coal is also preferred for its lower vols at 20-23%. Generally, the sponge iron producers look to buy material with vols of 22-24%, which is why some of the larger producers are also prepared to purchase a 6,000 kc NAR Richards Bay, but can take coal up to 26-27% vols. This allows for better heat management and productivity. Most Newcastle 5,500 kc NAR product has a vol range of 27-35%.
Last year, sponge iron buyers that test trialed Australian 5,500 kc NAR material found, due to its combination of unfavorable specifications, they needed to buy 20% more coal to get the same sponge iron output as the equivalent Richards Bay material. Any Australian purchased would be used in a blend.
In addition, Australian material also has swelling properties, which make it more difficult to handle in the DRI process, further deterring buyers.
Another factor maintaining the Indian demand for South African coal at these prices is that the sponge iron industry is still turning a profit with prices rising slightly to around INR17,000/t ($238), up from an average of INR16,500 ($231) in August-October.
However, there are some warning signs: the manufacturers are reducing the production of finished products (which requires more coal) and are concentrating production on unfinished products to maintain profitability.
India’s sponge iron buyers, which drive the market for South Africa’s 5,500 kc NAR material, typically buy on a spot basis and from stock and sale as they want to avoid building too much inventory.
The industry’s coal demand is estimated at around 36-37 mt this year. Large sponge iron makers like Aarati Steel, Tata Sponge, Visa Steel, JSPL and 3-4 other manufacturers use almost 100% imported coal for producing sponge iron. Smaller ones use imported coal depending on price economics.
Imports were expected to be 26-30 mt of that total, representing more than one-third of South Africa’s total exports of around 80 mt/y. However, this is likely to increase due to the mine floodings in central India caused by the wetter than usual monsoon.
There have been some high-profile consequences of the higher than normal precipitation. The third largest Indian opencast mining operation – the 35 mt/y capacity Dipak mine flooded, reducing output from 80,000 t/day to 10,000 t/d.
The mine’s production is mainly consumed by power stations, due it to being a quality below what sponge iron producers would take. However, it is thought that Coal India has diverted coals from higher quality mines to state-owned power stations in the region to fill the gap, robbing sponge iron producers of their contracted tonnages.
This has seen the smaller sponge iron producers look to import tonnes to fill the gap. Consequently, Indian port stocks of 5,500 kc NAR quality material have fallen drastically, stimulating current import demand. And with waiting times at Richards Bay minimal compare to the queues at Newcastle, there is another incentive to buy South African over Australian.
However, the Indian mines are now recovering from the deluge. The Dipak mine has now dewatered and is now operating at 65,000 t/d. Coal India, pressurised by the government, is trying to ramp production back up so that it can get as near as possible to its FY2020 target and power station stocks are getting back to pre-monsoon levels.
The result is that there is some backwardation in the API4 market with February 2020 paper $6 below December. In addition, while Indian demand has been a significant reason for the surge in Richards Bay prices, there is also a lack of available supply with most Q4 spot tonnes booked up in August/September, while there seems to be normal spot supply in Q1 2020.
Exports take centre stage
South African traders say more South African producers are blending their Richards Bay 4,800 kc NAR with higher c.v. material in order to cash in on the rising prices Indian sponge iron buyers are paying for 5,500 kc NAR material.
Due to this, surplus supplies are being diverted away from South Africa’s two domestic markets (Eskom and the inland market), where prices have remained steady for months despite the export rally.
In the domestic market, Grade A peas, equivalent to 6,300-6,500 kc NAR material, were heard being offered at around ZAR1,100/t ($74.54) free on truck/free on trail (FOT/FOR), unchanged month-on-month on a rand basis.
Grade B peas, equivalent to 6,000-6,300 kc NAR, continued to be offered at around ZAR1,000/t ($67.75).
This compares to the $95.50/t FOB trade out of Richards Bay this week, that translates to around $76.50/t FOT/FOR on a netback basis, when taking into account the $19.00/t costs for rail, port handling and taxes.
South African coal markets
Nov 2019 avg
Oct 2019 avg
Nov netback to mine gate
Oct netback to mine gate
Richards Bay 6,000 kc NAR
South African 5,700 kc NAR
South African 5,500 kc NAR
South African 4,800 kc NAR
Eskom 4,800 kc NAR
Domestic Grade A branded peas
Domestic Grade A generic peas
Domestic Grade B peas
Source: IHS Markit© 2019 IHS Markit
© 2019 IHS Markit®. All rights reserved.
18 Oct 2019 | McCloskey Coal Report
Southeast Asia could be the next hotspot for United States (US) thermal coal exports, helping to replace declining shipments to Europe.
Asia, specifically Southeast Asia, was a hot topic at IHS Markit's North American Export Coal & Gas Summit in San Francisco. Attendees spotlighted Southeast Asia as a potential lifeline for higher-sulphur, higher-heat coal.
Some said the US could get more than just a toehold in the growing region, which seems to be building its coal-fired power capacity at a faster rate than other countries getting out.
Xcoal Energy & Resources CEO Ernie Thrasher said the main areas for US export growth are the Middle East, Asia and Southeast Asia.
“Once you get outside North America, I haven’t found a fuel that dispatches cheaper than coal,” he said at the conference.
While nobody is saying the last tonne of US coal has sailed to Northwest Europe, there’s little doubt that relying on the region to be the trendsetter for exports is, likely, coming to an end. However, tapping into the growing markets in Asia isn’t going to be as easy as picking up the phone and negotiating prices.
Nick Cron, Xcoal’s head of portfolio optimization and marketing, said US exporters should now be game planning for the possibility Northwest Europe completely phases out of coal. While one door may be closing for the US – albeit a big one – others like North Africa and Eastern Europe are opening to, possibly, “absorb the loss from Western Europe.”
But the plans should extend further than just across the Atlantic.
“Southeast Asia needs to be a part of that,” said Cron.
Countries like Malaysia, Thailand and Vietnam may not mean much when it comes to the history of US exports, but they could be a big part of the future. Vietnam, for example, is going to see its coal use jump by 60 mt/y by 2030, and ceding that and other markets to other countries would seem to be shortsighted.
So far this year, Vietnam's thermal coal imports in the first nine months are up 113% year-on-year to 33.25 mt.
Although logistics could make it hard for the US to match prices, other countries would find it hard to match the heat value of US bituminous coals. Cron suggests the new markets could start by blending US coal with what they are already using to get them used to the heat value.
“They may need to start with a blend instead of going from 0 to 100 all at once.”
In the US’s favor, as Jim McCaffrey, CONSOL Energy's senior vice president of coal marketing pointed out, the supply lines are already in place. If a buyer comes knocking on the door for coal, the one sure thing is it can be delivered.
“We have a mature logistics system that’s already in place,” he said. “We don’t have to rely on a pipeline being built or a wire going up. It’s a shame people don’t see that.”
He also pointed out that while the international thermal markets probably don't “absolutely need” US coal, the stability of those logistics and the various qualities of coal that can be found here make it a good hedge against relying on too little sourcing.
Not all the “maybes” when it comes to exporting US coal work out. A year or so ago, the talk was Turkey was going to be a hot destination for high-sulphur US coal and it never panned out. In the meantime, other countries like Morocco and Egypt have become steady customers and did so without a lot of fanfare.
It wasn’t that long ago that people were talking about India becoming the new China for coal exports. The question now could be how long is it before a country like Vietnam becomes the new India?
© 2019 IHS Markit®. All rights reserved.
18 Oct 2019 | McCloskey Coal Report
China is unlikely to escalate its import controls now as authorities fear expectations of a harsh winter and the need for economic growth could spark a price rally which would unbalance the market, sources say.
China has been striving to keep 2019 imports flat on the year at 281 mt – a move believed to be an effort to protect domestic miners.
Various imports restrictions have been introduced in the last few months – but have failed to quell the flow, and have, in fact, led to near record levels of arrivals as buyers raced to bring in tonnage in the belief controls would become more severe later.
The latest trade data show China's 281 mt ceiling will almost certainly be surpassed by the end of this month.
However, with the limit near breached, China is showing no signs of further efforts to slow imports, with high levels of cargo clearances in recent days, according to market participants.
“We are seeing lots of cargoes get clearance from non-local customs authorities or from ports that have never handled coal before," one Chinese end-user said.
"It would be difficult for customs to manage the total under the current system."
China's total coal imports for 2019 are now being tipped to finish up at around 300-340 mt, by various analysts polled by IHS Markit.
“Beijing is unlikely to keep imports in check. Otherwise, the policy makers may risk stoking a price rally in winter,” an industrial participant said.
Policymakers are also keeping an eye on weather forecasts with China on course for average temperature that are 2-4℃ below the historical average in northern and coastal cities in January, according to AccuWeather, a weather forecast website, and this will push up coal consumption for heating.
The state-owned utilities have already been given the green light to bring in additional imports for winter stocking purposes.
“Each of the (state-owned) power groups has been given allowance,” a utility source said, while another utility source echoed that there was no disruption to their bookings at this time.
A third state-owned utility source was told by customs that there might be flexibility for quotas for power plants, but noted they were also advised that customs and state-controlled companies must tame imports as part of their “political task".
Meanwhile, another indicator of China's likely easing of its stance on import controls is that it has dropped a blanket curb on industrial production this winter.
Exemption is being given to producers such as steel mills and cement plants that can meet strict emissions standards.
Domestic coal prices have also appeared to reflect a thawing of the imports position, with the benchmark Bohai-rim Steam-coal Price Index (BSPI) dropping RMB1 on the week, to RMB577/t FOB, basis 5,500 kc NAR, from RMB578/t a week earlier.
The power tariff reform announced in late September might also stimulate imports, as generators will need to defend margins.
China is scrapping its benchmark pricing for coal-fired thermal power – established in 2004 – and replacing it with a base price and floating mechanism from 1 January 2020, China's state cabinet announced.
Generators will not be able to increase power prices for industrial and commercial users in 2020, under the scheme, officials said.
As such, power plants with the ability to turn to coal imports are likely to do so to keep their costs in check.
There is also an expectation among some that these generators may lobby the government to allow more imports next year, following two years of stringent controls on importing.
Coastal power plants in Jiangsu province were earlier this year used as a pilot ground for the reform, and were seen to increase their imports in response.
However, some market participants believe Beijing may reduce domestic contract benchmarks instead of opening up the seaborne market.
While the expectation of stricter controls lingered, China's total coal imports in September jumped 20% on the year to 30.28 mt from 25.14 mt, and beating market expectations.
“The robust imports included cargoes that arrived in July but were not able to get clearance until September,” a trader said.
The volume also reflected rising purchasing from utilities that were scooping up tonnage for winter, according to utility sources.
Imports were up 10% on the year in January-September to 251 mt. At this pace, China will surpass last year's imports level of 281 mt by the end of October.
Steel mills get extra
Elsewhere, two steel mills told IHS Markit that they were awarded extra import quota from their local customs authorities.
“I got clearance quota for two cargoes,” a steel mill source said, although they added that it had not been easy to attain.
“Local customs authorities were being cautious with handling clearance throughout the year. But toward the end of this year, they have managed to save some quota for end users,” another steel mill said.
Previously, it was rare for steel mills to get permission from their local customs offices.
As it stands, it appears there will be no repeat of last year – when China banned coal imports through the final weeks of the year in a bid to keep volumes within target.
That ban came to light in early October last year, when policymakers called an urgent meeting with power companies.
In contrast, there appears to be reticence from the state planner and the customs authorities this year towards such a drastic measure.
While ports in the southern provinces of Guangdong and Fujian exceeded their annual limits this week, there has yet to be signs of a step-up in restrictions at either.
However, sources have warned that while there may now be an acceptance from authorities that the 281 mt target will not be achieved, it does not mean that China will sit back and allow a large inflow of seaborne coal.
They suggest cargoes will still be getting evaluated for permission on a case-by-case basis.
© 2019 IHS Markit®. All rights reserved.
18 Oct 2019 | McCloskey Coal Report
Indian companies have mixed views on a proposed National Coal Index that the government hopes will attract larger participation in the forthcoming auction of coal blocks for commercial mining.
While those keen to take up commercial blocks believe such an index could offer global price parity, others in the industry fear it could be a precursor to linking Coal India’s prices to such a mechanism, which would make coal linkages more expensive.
Many feel the proposed index will be subject to global price volatility, making fuel cost pass-through for generators, who rely on fixed price through power purchase agreements (PPAs) more difficult to manage.
Advanced discussions are underway to formulate a National Coal Index, even as India’s Ministry of Coal prepares to offer as many as 11 coal blocks for a combined output of as much as 50 mt/y for commercial mining in December, sources said.
Following the August announcement of Foreign Direct Investment (FDI) in the coal sector, it was expected that foreign entities too would be allowed to participate, though sources say participation would be limited to Indian companies.
“Only Indian companies will be allowed to participate in the auctions of coal blocks to be offered for commercial mining,” the source added.
A draft discussion document seen by IHS Markit shows the government is considering two models for the index. The first one is to link coal prices to international indices, while the second model suggests that an average of monthly e-auction prices from Coal India be considered.
In the first model, coking coal will also contribute to the index, and include transactions completed via notified price, auctions and imports, which will be weighted.
The thermal component will comprise of three different types of coal – high, medium and low-grade coal. For the imported coal component in the model, the committee has recommended the use of an international index for coking and thermal coal.
A section of potential bidders looking to participate in the auction seems to favor the first model, which despite its complex structure, offers better certainty on returns on investments.
One industry source said since commercial mining would require hefty investments, the potential return on such investments is best captured by linking the index to global prices.
“It makes no sense to participate in auctions if prices are not linked to international prices,” an official of a company aiming to participate in December auctions told IHS Markit.
However, many in the industry feel it would escalate domestic prices.
“The proposed models don’t work as the price of domestic coal will increase, if we use the foreign component. Domestically produced coal is of lower CV and linking it to foreign index doesn’t make sense,” a mining source said.
The launch of the index may take more than a year due to the diverse opinion coming from stakeholders.
© 2019 IHS Markit®. All rights reserved.
7 Oct 2019 | Inside Coal
Queensland miner Bounty Mining, has been thrown a lifeline by another miner and 6.5% stakeholder, QCoal, with a A$90m ($60.75m) recapitalization deal; beating out competitor deals that were anticipated to be too dilutive for current stakeholders.
ASX-listed Bounty, which has been suspended from trading since it began formally talking to QCoal last week, announced today it had entered a facility agreement for the desperately needed refinancing.
The largest stakeholder, Amaroo Blackdown Investments (17.4%), associated with US trader XCoal, has lost out after its deal was strongly rejected by shareholders last week in favour of QCoal’s option, reported on Friday. Privately-held QCoal produces coking coal from a number of mines in the Northern Bowen Basin including recently commissioned Byerwen mine, which exports through the Abbot Point Coal terminal.
Bounty produces metallurgical coal from the Cook underground mine in Queensland, bought from Chinese backed Caledon Resources after it went into administration in 2017. Cook has been producing at around 1 mt/y since bord and pillar mining resumed in early 2018 but not at rates sufficient to turn a profit.
Amaroo advanced Bounty A$20m at the end of 2018 to provide the first tranche of working capital that got the mine through 2019 but problems have dogged the operation. Finding experienced operators, along with old equipment and problems getting service support for failing gear were among the issues faced since last year.
The Cook mine is currently converting to a different underground mining technique, called place changing, which is expected to increase production and reduce cash costs, a source said.
Meanwhile, QCoal’s deal provides cash funding of A$60m and a $30m guarantee facility which will be used to pay off debt owed to Amaroo and XCoal, originally due on 30 September.
Other obligations that will need to be serviced include replacing the rehabilitation bond guarantee currently held by Glencore, which owns the lease, as well as transferring the lease to Bounty.
Once the current coal offtake agreement with XCoal expires in January 2021, QCoal will take over the offtake for all of Cook’s output, to December 2025. A contingent royalty liability for Cook’s production also looms and QCoal’s funds also cover that.
Bounty has also agreed for QCoal to appoint up to 49% of the directors. “Bounty is now able to move forward with confidence and focus its energies on realizing the potential of our coal deposits,” said a clearly relieved Bounty chair Rob Stewart in the ASX statement.
For QCoal the investment is believed to hold a number of attractions, the Minyango deposit held by Bounty being key. QCoal has projects immediately to the north and to the east of the Cook deposits and sources said ultimately these could be combined into a bigger project.
Of primary significance is the currently underutilised Cook washplant facility. Sources said technically the plant was capable of processing up to 5 mt of run of mine coal, at least five times what it currently handles.
The Cook infrastructure may also in future give QCoal access to the Gladstone port, which could open up partial blending opportunities with its northern mining assets through Abbot Point.
© 2019 IHS Markit®. All rights reserved.
4 Oct 2019 | McCloskey Coal Report
As Taiwan’s government steps up pressure to reduce coal consumption, its dominant generator Taipower is expected to trim its term contract volumes of high c.v. coal by as much as 2.50 mt next year, with a likely uptick in spot tonnes, market sources say.
It is understood there are six high c.v. (6,200 kc GAR) contracts for 0.50 mt/y expiring this year, with four of them from Australian producers. Of those, only one term contract has been renewed, with Glencore understood to have won the six-year tender for supply of 0.50 mt/y.
Prices were heard at around $64/t FOB basis 6,200 kc GAR for the first year with subsequent years settled on April start Japanese Reference Price.
Pressure has been mounting on Taipower to reduce coal consumption to alleviate air pollution concerns, with the generator already trimming its overall coal imports to around 28- 29 mt this year from 32 mt two years ago.
But with presidential elections scheduled for January 2020, policy measures can smack of political expediency. With Newcastle benchmark 6,000 kc NAR prices down 30% in the last six months, Taipower came into the market in May with a slew of spot tenders, breaking a six-month hiatus.
After exercising its minus 20% option on its 2019 term coal contracts in August, it also cancelled a recent spot tender the same month for high c.v coal, after the government directed the utility to switch to gas-fired generation.
Recent tender outcomes also highlight a degree of caution by Taipower with its latest tender for eight cargoes of 5,900 kc GAR coal only partially awarded, sources said.
“Because of winter time, Taipower typically will reduce coal consumption, so don’t have much coal demand for the last quarter,” said a source in Taiwan.
The source added, for next year Taipower hopes to maintain its coal imports at around 28-29 mt, but is keen to retain flexibility on procurement. The generator typically buys around 20%-30% in the spot market with the rest term contracted.
“Taipower wants to maintain the flexibility because if the local government wants to reduce coal consumption then it will not secure that many spot coal cargoes,” the source said.
Australian producer sources say with 2.50 mt not being contracted, suppliers will have to look for alternative markets, a task compounded not only by a weak market but also other buyers like South Korea signaling winter shut downs of coal-fired generation.
“Taipower don’t need as much coal next year, and so they are only renewing (term contract) what they think they need,” said an Australian producer source.
Also, it is understood Taiwan’s government has once again cut back coal utilization allowed at Taichung power plant, which typically used to consume 21 mt/y. That has since been reduced to 16 mt/y since 2018 and is now slated for further reduction to 12.6 mt next year.
“That’s a lot tonnes they have cut, and it’s reflective of what they are not purchasing in term contracts,” said the Australian source.
Taiwan’s coal consumption was 67.1 mt last year, and if Taipower doesn’t offset the lower term volumes via spot tonnes, it could reduce consumption by around 4.0% next year.
As reported last week, Taipower, suspended five units, with 2.7 GW of combined capacity cut over winter months to reduce pollution.
Three of those units are at the country’s largest coal-fired plant, the 5.5 GW Taichung Power Plant to bring its coal consumption to under the 16 mt limit set by the local authorities for this year.
Two of the four units at Taiwan’s third largest coal-fired plant, the 2.1 GW Hsinta plant in Kaohsiung, are also temporarily closed now - with one of those the 550 MW unit one and the other the 500 MW unit four.
Coal consumption at the other two units at Hsinta is also being cut, with unit two’s utilisation reduced to 76% and unit three to 78% Taipower added. Utilisation reductions have also been brought into effect at the 1.6 GW Linkou power plant, with the 800 MW unit two now capped at 46%.
The closures mean 14% of Taiwan’s coal-fired generating capacity has been taken offline. Taipower has not detailed the exact timeframe for the possible closures only indicating it’ll last through winter.
On an assumption the closures will be for around three months, around 2 mt of coal burn could be impacted by the capacity closures alone, not factoring the utilisation reductions at the other units.
© 2019 IHS Markit®. All rights reserved.
4 Oct 2019 | McCloskey Coal Report
Despite the risk of greater import controls, Chinese metallurgical coal buyers are finding import prices too good to refuse due to the huge discounts being offered in comparison to domestic supplies.
Spot deals have been elevated in the last three months – with 93 trades seen in July-September, compared with 38 in April-June.
In September alone, Chinese buyers concluded at least 25 spot deals of prime hard coking coal on both FOB and CFR terms, but activity has tapered off in the last week of the month ahead of China’s Golden Week holiday, when trading typically comes to a halt.
Australian prime hard coking coal prices have fallen to a discount of around RMB150/t ($21.07/t) against China’s Shanxi hard coking coal.
That margin has simply been too tempting for steel plants, despite the risk of lengthy clearances and the prospect of further import curbs at ports.
The IHS Markit assessment for low-volatile coal (MCC4) was $160.50/t CFR China on Wednesday. Shanxi Liulin hard coking coal was reported at RMB1,500/t ($210.67/t) ex-washery, roughly equivalent to Shanxi PLV at around $182.09/t CFR (exclusive of 13% tax and port charges).
“Prices are too cheap for us to ignore, and we are happy to buy seaborne cargoes,” a steel mill source said, adding that the margins were enough to offset at least two months of demurrage of $12-13/t.
Some steel producers were seen placing their orders before fixing a discharging port or designated customs for clearance.
Optimism from Chinese buyers also explains the record high import volume in August, when China’s intake of coking coal was 9.07 mt, breaching the 9 mt mark for the first time.
August tonnage was also way above expectations by market participants, who said lower profit margins for steel would hurt met coal consumption.
Meanwhile, Chinese coal miners claim to be the victims of robust imports, accusing trading companies of dumping Australian cargoes and sinking the market.
“We have had to cut spot prices twice since August to boost sales,” said a manager from Shandong Energy.
“Our product is not competitive, especially when some market players are offering lower and lower prices to get rid of their seaborne cargoes as soon as they can.”
Another miner said domestic coal companies may face deeper cuts in winter on top of mining capacity affected by environmental and safety checks due to volatility in international prices.
“The (domestic) market is in trouble,” said a third coking coal trader. “For years, domestic prices remained stable and were guided by benchmark Shanxi Coking Coal prices. It is unprecedented to watch the turmoil in international markets spread to domestic markets and drag down prices.”
So far, Chinese coal producers have been insulated from steep losses because most of their sales are fixed on term contract prices.
Domestic prices are likely to get some support in the fourth quarter by potential curbs on production.
The forward curve in the international markets is currently in contango with FOB Australia prices for November and December above the current spot price and bids for December loading cargoes some $5-6/t higher than November bids for similar brands.
A prolonged trade war and indications of a slowdown in China’s economy may erode margins for the steel industry next year.
Some steel mills plan to cut back term contract volumes with foreign suppliers as they bet on the market slump rolling into next year, they said.
“It doesn’t make sense for us to take long-term contacts when seaborne prices are floating above $200/t CFR China levels like early this year, and we can buy cargoes in the spot market anytime to take advantage of better prices,” a Chinese steel mill source said.
Currently, most major Chinese steel mills continue to fix term contracts for premium low-vol coking coal like Saraji or Peak Downs brands to secure supply. But some buyers are looking at transferring more volume into the spot market, with the advantage of the current price differential and flexible loading dates.
© 2019 IHS Markit®. All rights reserved.
4 Oct 2019 | McCloskey Coal Report
Swiss-based commodities house Glencore and lead Japanese negotiator Tohoku Electric are understood to again be at odds over their price views for the October start annual thermal coal contracts, with no expectations of a swift settlement for the Japanese Reference Price (JRP).
Glencore is understood to be seeking a mid-$70s annual reference price, while Tohoku is unwilling to go beyond $67/t FOB.
“They are still well over $10 apart,” said a Japanese source noting the gyrations in the Newcastle index made it harder for an early settlement.
While smaller parcels of Newcastle 6,000 kc NAR coal have been bid up recently, with two 25,000 t December clips trading earlier this week at $70/t and $69/t FOB basis 6,000 kc NAR, full cargoes have transacted at considerable discounts with a 75,000 t November trading at $62.50/t FOB, same basis.
Sources say transacted valued of the larger quantity was more representative of the market.
“The spot market definitely favours Tohoku,” said a second trader.
Sources point out, given Tohoku’s volumes for October start contracts from Glencore are around 0.50 mt, it might be in Glencore’s interest to get an early settlement.
“Tohoku is not in a big rush to settle,” said the first source.
From the producers’ side, one source said with supply relatively stable, price expectations were largely flat.
“I see (Newcastle prices) holding. I hope the falling Australian dollar doesn’t make people lower their price and smart people should lock in $66-67/t for higher volumes,” said a producer source.
Others concur noting if producers other than Glencore end up striking deals for higher volumes, it could potentially dilute the miner’s negotiating position.
“I am not sure how much coal Tohoku is after, they have others they can tap,” said a second producer source.
What also potentially complicates a timely settlement is the fact that Japanese utilities, particularly Tohoku, have increasingly become wary of being considered benchmark setters and instead have been keen to hammer out individual deals.
With just around 25-30% of prices for Japan’s annual thermal volumes actually set on a benchmark fixed price basis, the pricing systems has been under pressure.
And other utilities have done their own deals.
Sources point to Hokuriku Electric’s recent spot and term tender heard to be for a total of around 2 mt, which was awarded at around $68/t FOB, with Glencore winning the bulk of the volumes.
With Hokuriku’s annual requirements largely complete, the utility is unlikely to be proactive in the JRP talks.
However, not all end-users are indifferent to a JRP settlement, with Japanese general industry (JGI) users and other utilities outside of Japan such as Taiwan’s Taipower keen to see a deal done.
Sources in Japan say at least some of the JGI customers, who import a combined total of over 20 mt/y, have held off on spot tenders awaiting the settlement of the October start JRP.
Equally, Taipower is also keenly watching the negotiations as at least one term contract from an Australian supplier for 0.50 mt/y is referenced to the October start price.
For these end-users getting an outcome is key, as provisional pricing would mean a roll-over of last year’s October start price of $109.77/t FOB, basis 6,322 GAR.
That said, some market participants also note the Newcastle price curve suggest a building in of risk for supply shortage. With Russian supplies expected to see seasonal fall, and US exports significantly cut, it could gradually affect physical market.
© 2019 IHS Markit®. All rights reserved.