India: Thermal coal demand from South Africa undergoes major transition impacting RB3 grade prices

South African coal demand in India's sponge iron sector has undergone a major transition following the Russia-Ukraine war, and with the Indian government's imposition of export duty on steel and raw materials in end-May.

The rise in thermal coal prices since March (subsequent to the Russia-Ukraine war) compelled domestic DRI producers to opt for coal from Russia, Australia, and Mozambique, thereby adversely impacting demand and prices for traditionally-sourced South African material.

DRI producers are heard experimenting with cost-competitive new blends, different from conventional RB2 (5500 NAR) or even RB3 (4800 NAR) grade coals as are outlined below:

• Russian 6000 NAR + domestic coal
  
  
• Australian Carmichael (Adani's mine) coal (4600 nar) + domestic coal
  
  
• South African RB3 + Australian Carmichael
  
  
• Mozambique VT1 grade
  
  

The shift in the raw material mix has given more bargaining power to sponge iron manufacturers as portside prices of RB3 have declined by INR 1,300/t m-o-m basis to INR 13,700/t at Vizag Port, and has plunged INR 5,800/t since the peak in May before the duty imposition.

As per CoalMint analysis, the price for South African 5500 NAR per 1000 kcal/kg is currently assessed at $41/t and 4800 NAR at $33/t per 1000 kcal/kg. Russian 6000 NAR grade at $30/t while Australian 4600 NAR at $28/t per 1000 kcal/kg.

Another factor that has promoted the usage of coal from other origins is softening of sponge iron demand since the past few months due to bearish steel sentiments. This forced DRI plants to operate at reduced capacities, giving them an opportunity to blend coal from different origins to bring down operating costs.

In the past one month, domestic sponge iron prices have come down by INR 3,000/t and by INR 11,000/t from the March highs.

South African 6000 NAR coal prices fall

A decline in global LNG prices this week resulted in South African RB1 (6000 NAR) grade coal prices to slip by $25/t w-o-w to $308/t on FOB basis.

The decline in prices came after the European Union announced its intention to intervene in the energy market to cap the sharp rise in LNG prices.

The EU is considering electricity cuts during peak demand, revenue caps for energy companies, and more liquidity for companies struggling with record high energy prices, among other measures including, most importantly, taxing energy companies that have made windfall profits to channel funds into the social sector during the current period of high inflation.

On the other hand, RB3 (4800 NAR) grade prices are currently heard at $158/t CIF for end-October laycan, while RB2 (5500 NAR) coal prices are at $235/t CIF India.

What lies ahead?

With high-CV coal being directed to Europe, prices are expected to remain elevated. This would restrict Indian demand to cheaper RB3 coal. However, the increasing presence and viability of alternate-origin coal may pull down RB3 prices further in the coming days.