Moderate outlook on China's coke prices

Chinese coke prices are volatile at present. Futures have fallen sharply for three consecutive days, from a high of RMB 3847/tonne (t) (596/t) to close at RMB 3,373/t ($523/t) on 15 Sept'21, a cumulative drop of RMB 505.5/t ($78t), which is as high as 13%.

But port-side price at Rizhao Port is RMB 4,150 /t ($643/t). Many coke-makers are bracing for an 11th round of price increase. With spot prices rising and futures falling, expectation of limited production in autumn-winter is being reflected in the futures, SteelMint learnt from a report by the Beijing Lange Steel Information Research Centre.

High coal prices support coke prices

Spot prices have increased by RMB 2,000/t ($310/t) at present compared to RMB 2,150/t ($333/t) in the same period last year, reaching decadal highs. However, profits of coking enterprises have fallen by around RMB 35/t ($5.42/t). The sharp rise in coke prices and the dip in profits are mainly due to the sharp rise in costs. For instance, coking coal prices from Mongolia have increased to RMB 3,780/t ($596/t) compared to RMB 1,290/t ($200/t) in same period last year.

The supply-demand balance has been disrupted due to the pandemic, tightening safety norms and lack of imported sources and high met coal prices. Therefore, profits did not expand with the increase in coke prices.

Supply-demand balance disrupted

The utilisation rate of coke ovens has been declining for five consecutive weeks. As of 10 Sept'21, the utilisation rate of the surveyed independent coking companies was 77%, which was 4.61% lower than the previous high.

The decline in coke production is mainly due to two factors. One is raw material prices. After the import of Australian coal was banned, and the pandemic factor was added, the supply of coke was impacted. Coke companies had insufficient inventory and had to restrict production. Secondly, tightening environmental protection norms. Inspections decreased the production load of most coking companies by 50-70%. Recently, two coke companies in Xuzhou implemented a 50% production cut, which affected daily supply by around. 15,000 tonnes.

Moreover, crude steel production curbs led mills to lower molten iron output. Data reveals that the utilisation rate of blast furnace iron-making capacity reduced to 85%, and the average daily molten iron output is at 2,256,300 t, both of which are relatively low. With the advent of the heating season later in the year blast furnace output is expected to decline further.

Overall inventory falling

Due to high prices, most traders continue to clear warehouses.

Last Friday, port-side coke inventory was at 1.568 million tonnes (mn t), a decrease of 1.167 mn t compared to the same period last year. Inventory of coking enterprises was at a low 450,800 t. The inventory of steel mills was at 7,420,400 t, much lower than in previous years, but in the context of limited production, the average availability is close to the level of the same period in previous years. Therefore, because of low inventory in the entire system, coke spot prices still have an upward momentum.

Outlook

Coke futures have fallen sharply due to the lack of upstream coal and production restrictions, while downstream steel mills are facing production restrictions.

However, due to weather factors, coke companies will actively carry out winter storage, and prices of coke will see limited scope to rise. At present, the current price difference between spot and futures is wide. However, when expectations of limited production in autumn and winter are truly met, there may be a deviation from the current situation, ie, spot price may fall and futures rise. Thus, in the context of carbon neutrality, it is not advisable to be too bearish on coke prices but maintain a moderate outlook.