China: Coking coal supply gap a concern, coke exports to reduce

In 2021, the challenges faced by the Chinese domestic coal industry included high coal prices and obstacles in the coal supply. For 2022, the key challenges would be similar but the road ahead depends on supply and demand variables.

On the supply side, enhancing the domestic production capacity of coking coal and coke is the priority of the government. Imports are necessary to narrow the supply-demand gap.

Demand-side analysis.

Coking coal: In 2012, demand for coking coal was under pressure, due to certain factors:

• Crude steel production in 2021 decreased 3% y-o-y.
  
  
• Due to the Beijing Winter Olympics, steel mills in northern China are not running at their optimal capacity.
  
  

Thus, crude steel output in 2022 is more likely to decrease or remain flat y-o-y.

• In 2021, China's pig iron output dropped by 4.3% y-on-y because of the implementation of the carbon peaking plan for the domestic steel industry.
  
  

In 2022, it is a high probability that Chinese domestic pig iron production will not increase or will continue to decline y-o-y.

Coke

The "dual carbon" policy has put certain constraints on coke production. Coke exports will return to normal as overseas blast furnaces resume production as markets recover from the Omicron wave. But there is little room for growth in China's domestic production. Coke demand will continue to be under pressure.

Supply-side analysis

Coking coal and coke

China is facing a low growth rate in coking coal production which is impacting domestic supply of the material. The reasons for low production are:

• Existing production capacity cannot well resolve the problem of supply shortage.
  
  
• Increased coal mine capacity in the past two years is insignificant.
  
  
• In China, high-quality coking resources are scarce.
  
  

Where coke is concerned, there will be some net increase in 2022. The output will return to the level of 2019 which was reduced in 2021.

Imports

China requires imported coal but this is not going to come from Australia. The Covid-19 outbreak in Mongolia led to interruptions in Mongolian coal customs clearance but this issue is expected to resolve and supply from this country will rebound in 2022.

However, as a policy, in 2022, the Chinese will rely on domestic coal supply. It is expected that the controls on coal imports will continue.

Outlook

For 2022, the supply gap in coking coal is going to be a challenge. Domestic prices of coking coal are expected to be high and profit margins will be under pressure.

In coke, it is expected that the export demand in 2022 will be same or slightly decrease y-o-y.