Japan: Top industry body to probe coking coal price volatility

The Japan Iron and Steel Federation (JISF) has started research and analysis of steel raw material market trends, with an emphasis on coking coal which has undergone significant price changes. Spot seaborne trades in coking coal have been low but it is true that such a relatively small spot market has affected the quarterly pricing used by Japanese blast furnace steel manufacturers.

Speculative trading?

Yoshihisa Kitano, Chairman of JSIF and President, JFE Steel, said last month that the steel industry's biggest problem was the high price of raw materials. Because irregular swings in raw material costs may impede the industry's development, JSIF will conduct market research and the investigation will be led primarily by the Raw Material Expert Committee, a subordinate entity of the Raw Material Policy Committee.

The price of coking coal has increased significantly over the last year. Since last fall, the spot FOB price for China for premium Australian hard coking coal, which is indicative of the quarterly price to Japan, has increased substantially. It reached a record high of $670/tonne (t) in March this year. Because of the high spot price, the price for April-June shipments to Japan has also risen to a record high of $526/t.

The volume of seaborne trade in hard coking coal, the major raw material for met coke, is over 200 million tonnes (mnt) per year. It is unclear how much of this is spot trading, although it is assumed to be around a quarter of this at most. Spot trading is projected to decrease further after 2020 when China, the world's largest steel manufacturer, essentially stopped importing from Australia.

The main aspect of the spot market is the entry of traders. Traders often trade based on actual demand but, in many cases, they shift to speculative trading in anticipation of price changes. According to market participants, some transactions are unrelated to actual sales. There is no issue with traders entering the market, but it has been noted that, in addition to the small scale, it is difficult to understand how transactions that are not based on genuine demand affect spot price formation.

Squeezing spreads of BF steelmakers

The majority of coking coal and iron ore is used by blast furnace manufacturers. As a result, demand for coking coal and iron ore is often proportionate to blast furnace steel manufacturers' physical performance.

However, coking coal and iron ore moved in opposite directions last year. Despite the exceptional circumstances of China's embargo on Australian coking coal, even though iron ore fell to a modified low, only coking coal stayed high. Some argue that the unexpected price changes are "driven by the spot market's susceptibility".

The quarterly price for Japan is determined using the spot price (index). If price fluctuations are inconsistent with the actual demand of the steel market, it may impede the steel industry's development by reducing the profitability of blast furnace steel manufacturers.

Since last weekend, the coking coal spot price (Australia FOB) has been in the revision phase. It is currently roughly $365/t. When compared with a month ago, the price has fallen by around 30%. However, it is higher than the pre-COVID-19 high of $310/t FOB Australia in 2016 and despite the decline in demand for steel goods, it may be claimed that it has stayed excessively high.

While the spot price is falling, the quarterly price to Japan (loading from April to June) has reached a new high of $526/t. The cost burden on blast furnace manufacturers is at an all-time high.

India's blast furnace steel producers are also facing similar issues - extremely high coking coal prices amidst supply uncertainty.

To know more about the key drivers in the coal economy join us at India Coal Outlook Conference. CoalMint will be hosting the India Coal Outlook Conference on 3-4 August 2022 at The Lalit, New Delhi, to discuss the key issues pertaining to domestic coal production and supply, the government's objective of controlling imports and domestic supply gap affecting many industries, the need to increase the purchasing power of Indian steel companies in the volatile global coking coal market as well as issues related to decarbonisation of the coal value chain.