Coking coal prices have breached record highs. How long will the rally continue?

Global coking coal prices have breached all-time highs and the amazing rally still continues. Prices of Australian premium coking coal have jumped to around $430/t on FOB levels this week compared to $110-120/t in April'21.

What could explain this phenomenal 250% rise in the prices of this key steelmaking raw material within a short span of just six months?

SteelMint's recent webinar - 'Where are Global Coking Coal Prices Heading?' - saw in-depth analysis of the reasons behind the surprising rally in global coking coal prices. Held as part of the 'ENGAGE 2021' webinar series, the expert at the session was Navjot Singh Saini, Head Coking Coal & Met Coke (India Region), Trafigura.

Supply deficit

Political tensions between China and Australia from May'20 onwards initially stirred uncertainties in the market, observed Saini. "From Oct-Nov'20, CFR China prices of premium low volatile (PLV) coking coal started increasing at a dizzying pace and seaborne Australian coal prices rose typically on that trend," he said.

"Chinese buyers started sourcing material from Colombia, the US, Mozambique and elsewhere and supply tightness gripped the seaborne market as coking coal cargoes from these countries used to flow to Japan, South Korea, Europe and Latin America. The tight supply situation was reflected in Australian coal prices," he stated.

In 2019, Australian supplies stood at 185.5 million tonnes (mn t), which fell to 172.5 mn t in 2020, with COVID-19 impacting mining operations in Australia and miners in that country cutting down production of grades that were supplied to China previously. Operations at coal washing units of major miners also remained suspended.

Among the other suppliers, domestic consumption in Russia is very high and Russian and US cargoes are flowing to the highest bidder -China. Logistical problems in Russia have curtailed exports. The State-run railway is especialy focusing more on transportation of thermal coal and even some Russian pulverized coal injection (PCI) miners are selling their material as thermal coal.

Canadian supplies are increasing because of the high price environment encouraging exports, mainly to china. Moreover, after the COVID-induced lockdown restrictions were lifted in that country production from new mines has come on stream.

"The US supplied 48 mn t of coking coal in 2019, around 38 mn t in 2020 and is expected to supply 41 mn t in 2021. So supply pressures are very evident," Saini contends.

China factor

COVID-related restrictions and China's containment measures have drastically curtailed its much-needed supplies from Mongolia which have fallen from 33-35 mn t in 2019 to around 12 mn t this year. This is a key reason why China is paying high prices for seaborne cargoes.

Saini argues that supply shortfall in 2020 was around 43 mn t compared to 2019. China has bought only 50 mn t from the seaborne market this year. The crucial factors for China are capacity expansion of domestic coking coal mines, which was low in 2020.

The government is pushing for new capacity addition. China's coking coal production in 2021 saw a sharp fall: washed coal production stood at 480 mn t and 50 mn t were imports. This triggered domestic coking coal shortage in China. However, during the winter heating season the government's focus is likely to stay fixed on thermal coal, Saini says.

Moreover, China's delays in coke production investments since 2018, which will still take time to flow into the market, has created domestic met coke shortage and prices have climbed to around $650/t.

Demand scenario

There is a definite possibility of European demand inching up to 299 mn t in 2021 on projected good recovery in pig iron production following the uptrend in the steel market after the peak COVID-19 phase.

India's pig iron production in 2021 is already higher than the last three years and a V-shaped recovery in Indian crude steel production in 2021 is being observed. India has 80 mn t of capex plans in steelmaking and with more than 60 mn t of imports has emerged as the leading seaborne coking coal consumer ahead of China, Japan and South Korea.

In May-June'20 coke costs were the lowest in India. However, later on the arbitrage of Indian coke flowing into the overseas market started increasing rapidly and till today coke exports by India are happening, he observed.

On the other hand, Japan, South Korea and Taiwan have seen increased pig iron output in 2021 thus far. The semiconductor shortage is also easing and, therefore, automobile production and steel demand in these countries are expected to rise.

Will prices cool?

At present, Columbian and Russian cargoes are flowing at higher prices into China. The big Indian steel mills have long-term contracts with Australian miners on an index-linked month-on-month pricing basis. However, due to additional demand from the big mills less material is available in the spot market. This is contributing to the high price environment, Saini argued.

"For China, however, the focus is on domestic coal production and steel production curbs pose downside risks to the rally in seaborne coking coal prices. So, prices may soften going forward. During the energy crisis, China did not lift the ban on Australian coal. The ban is likely to continue," he said.

If China's domestic production rises, it will buy less seaborne cargo, which will cool down prices. More import options for China will keep prices depressed. That way, prices may cool in the next three months, Saini said.

China is buying less seaborne coking coal. In 2019 it imported 88 mn t which fell to 77 mn t in 2020 and still lower to an estimated 50 mn t in 2021. Demand is down because of lower crude steel production, enhanced usage of ferrous scrap, and measures to boost domestic production.