China Coking Coal Premiums in Check as Coronavirus Hits Steel Market
March 11, 2020 - China's domestic coking coal prices remain lofty compared with seaborne and regional markets elsewhere, but the coronavirus effect on China's steel inventory and steel demand may push markets closer together, according to market sources.
Already, traders are eyeing a narrowing in the Shanxi domestic premium low-vol coal spread over imported premium HCC.
The parity spread for domestic PLV moved down to just below $25/mt on March 4, from February's average of around $34/mt higher than imported PLV, according to S&P Global Platts data.
Chinese met coke prices fell last week to $268/mt DDP North China, from around $278/mt in February.
Chinese coke prices are starting to close in on coke prices in other regions, and may soon start to affect met coal demand if seaborne buyers armed with new contract terms from April decide to wait on the sidelines.
The rise in seaborne coking coal benchmarks such as Platts Premium Low Vol, and second tier HCC 64, has accompanied weaker production in Queensland, which is partly the seasonal rain effect but also this time on mining disruptions.
With more mills in the spot market, China's open import arbitrage fueled traders to buy on both CFR China and FOB Australia terms, after customs restrictions at the end of 2019 eased off.
China imported almost 75 million mt of coking coal in 2019, up just over 16% on 2018.
Spot volumes for premium mid-vols mainly into China and India, and tighter spot supply for second-tier Rangal coals have supported indices.
Spot Trade Volume
Compared with 2019, year-to-date spot trade volume is markedly down, based on trade data collected by Platts,
Low spot demand from contract-heavy Europe, Brazil and northeast Asia buyers may lead spot prices down if China slows down.
China is heavily reliant on iron ore imports, and a move in iron ore stocks may signal a move toward normality for the steel industry, Commerzbank analysts said Tuesday.
"Iron ore stocks offer a glimmer of hope – they have fallen somewhat of late, which is attributed to the fact that supply chains in China are now functioning better again. While imports have proven relatively robust, exports have shown noticeable signs of slowing," Commerzbank said.
"Exports of aluminum and aluminum products were 25% down on the same period last year, while steel product exports were 27% lower," the bank said.
Any rebound in steel exports, to help manage steel inventory built up during a slowdown in activity over the past two months, may still face greater seaborne competition, according to China industry sources.
Steel mills could be forced to slow rates temporarily, while they focus on steel for infrastructure stimulus.
Potential for US coking coal trade with China's import tariff exemptions opening up for applications in March, and softer US met coal pricing and demand in other markets, is being talked up with new low-vol HCC trades booked.
Broker BRS this week indicated Capesize vessels voyage rates from Hampton Roads in the US to Qingdao, northeast China, at $19/mt, down $2.50/mt on a week earlier.
Weaker near-term steel raw materials demand in China after disruptions to steel use and demand at property construction sites and end user manufacturing plants across the country, could limit new spot coal volumes, irrespective of price.
US Market Share
The potential for US coals capturing market share in China over the course of the year is strong as China commits to reduce its trade surplus.
But there are fears that any growth in US volumes may be at the cost of Australian and Canadian imports to China, according to several coal industry executives.
"What we may see is that US coal increases to China, but elsewhere there will be more competition, and the volumes are lost in another arena," a source said.
That could potentially lead to weaker Australian spot prices, and may limit trade opportunity.
China's coal market is a key industry for employment, with coking coal and thermal imports contributing to a far larger overall supply base across coals for the steel, power and cement industries.
However, tougher geology in areas such as Shanxi and Shaanxi provinces, and tighter mining safety and operational measures, along with environmental restrictions on coke plants, could contribute to a further reliance on coking coal imports.
For mines in Australia, Canada and the US operating at the lower end of the global cost curve, out of reach for Chinese coking coal mines typically at higher cost.
Rail and shipping transportation costs, and trade policy may help shape any further swings in favor of imports for China.
Should China try and meet its steel and pig iron targets for 2020, there may be sufficient impetus to secure raw materials the coronavirus outbreak may be seen as a blip, rather than a black swan event.