China: Coking coal, coke prices may gradually stabilise in Q4 FY'22

Since Jul'21, volatility in the bulk commodity market has resulted in a round of sharp rise in prices of coking coal, coke, and thermal coal. Due to tight supply, the price of coking coal has risen fast. In fact, the spot price is more than 100% higher than the medium and long-term contract price of coal. At the same time, high coking coal prices have driven coke prices higher.

The China Coal Transportation and Marketing Association reminded recently that the upstream and downstream coal companies should remain vigilant against price rise and enter into agreements/contracts for specific periods to beat price rise.

Production restrictions in China's steel industry have resulted in iron ore prices falling from a high of late. The sharp drop in iron ore prices has increased margins of steelmakers and, therefore, firm demand for met coal is boosting prices.

Supply crunch boosts prices

In end-Aug, Ganqimaodu Port played an important role in the latest round of coking coal price increases. The Port is the most important for China to import Mongolian coal. Half of the coking coal imported from Mongolia is cleared here. On 24 Aug, due to the prevention and control of the epidemic, Ganqimaodu Port received a notice that it would suspend the import of coal from Mongolia for two weeks, which aggravated the market's concern about the tight supply of coking coal.

On 10 Sep, the coking coal futures rose to a maximum of RMB 3,099/t ($480.76), an increase of 72% in just two months. The spot price of coking coal has increased even more. Taking Inner Mongolia as an example, the price rose from RMB 1,850/t ($287) on 10 Jul to RMB 3,450/t ($535.22) on 14 Sep, an increase of 86% during the period.

Restrictions on Australian coal imports, reduction of Mongolian coal imports due to the epidemic, and the strict security rectification in Shanxi this year have led to tight supply of coking coal.

At the same time, the capacity replacement of the coking industry in 2021 is coming to an end. New large coking ovens have greatly increased the demand for high-quality, low-sulphur coking coal. However, the market for high-quality coking coal has limited resources and reduced imports, which has once again pushed up prices.

As a result, the main contract price of coke futures rose from RMB 2,400/t ($372.32) to RMB 3,847/t ($596.81), an increase of 60% during the period.

Due to environmental protection measures steel output is falling and, therefore, the supply pressure is expected to alleviate gradually. Coking coal and coke are still subject to supply disturbances in the short term. However, due to long-term demand disturbances, speculation and stockpiling have been significantly reduced and prices are expected to gradually stabilise.

Supply-demand pressure to ease

Soaring prices of coking coal and coke have attracted great attention from various futures exchanges, so regulatory authorities have increased the margin and handling fees to prevent market risks and overheating of transactions.

Whether the supply-demand imbalance and price increase of coal can be eased in Q4 is a question that has attracted market attention. The National Development and Reform Commission (NDRC) issued a notice to various localities and related enterprises to make arrangements for the full coverage of medium- and long-term coal contracts for direct insurance of power generation and heating enterprises.

The contradiction between coal supply and demand may gradually ease in Q4, and the NDRC will accelerate the nuclear increase of production capacity such as from open-pit coal mines. It is expected that the release of coal production capacity will gradually accelerate.

However, the absolute inventory at coal mines, ports, and power plants is relatively low, and the challenge of energy and electricity safety in winter is still relatively stiff. On the whole, coal prices may slowly adjust downwards.

What may happen in Q4?

There is high probability that crude steel output this year will not exceed that of 2020. Infrastructure demand is expected to continue until next year, driven by funds such as special debts, but real estate financing has not loosened, and demand may be weaker than infrastructure. The development of the epidemic situation needs to be observed in Q4 which may present a situation of weak supply and relatively flat demand.

Q4 is also the time for winter production cuts for the steel industry. The cost pressure has not been completely relieved, and the demand will gradually turn into the off-season. Therefore, the cyclical stock market, for bulk commodities such as coal, may enter a phased adjustment stage.