The decision to launch these indices stems from consistent feedback on the need for more representative references for this relatively illiquid segment of the steelmaking raw materials market.
At the moment, prices for PCI are determined via face-to-face negotiations that lead to either a fixed price for a given period of time - usually a quarter - or a percentage of a contract price paid for premium hard coking coal over a quarter.
A segment of the market also prices PCI against spot market indices at either a premium or a discount.
Mills’ proclivity for certain PCI brands or specifications are based on the structure of their blast furnaces and the cost efficiencies that the materials bring to the steelmaking process.
PCI usage is often described by steelmakers as “an art rather than a science”, given the array of factors that determine its value for the consumer.
Understanding the PCI market
As the name suggests, PCI entails the injection of large volumes of pulverized coal into the blast furnace as a supplemental carbon source to facilitate the production of hot iron.
It serves as a fuel and a reducing agent in a blast furnace, and for this reason, it is often used as a replacement for metallurgical coke.
The main advantage of using PCI lies in the cost efficiency it brings to the steelmaking process. PCI products are always cheaper than metallurgical coke and the hard coking coal that is used to produce coke.
That said, PCI materials cannot replace metallurgical coke in a blast furnace because the coke bed holds the metallic burden in the furnace and lends it permeability.
In short, while metallurgical coke is still needed to ensure the efficient performance of a blast furnace, an increase in the usage PCI results in a more stringent requirement in relation to coke quality.
Typically, higher metallurgical coke prices encourage steel mills to increase their usage of PCI in blast furnaces to lower hot metal production costs.
While in theory that is true, most mills will usually maximize their PCI usage anyway since it is always cost effective to do so.
Different end-users have different drivers that determine their PCI procurement strategy.
Japanese steel mills generally prefer PCI with low-volatile matter, commonly referred to as low-vol PCI, while Indian mills have a penchant for materials with mid-volatile matter, commonly called mid-vol PCI cargoes.
Low-vol PCI provides better coke replacement in blast furnaces and typically contains a higher calorific value, a crucial requirement for Japanese mills that operate large blast furnaces.
Examples of low-vol PCI brands include Foxleigh, Coppabella and South Walker Creek.
Indian steelmakers prefer mid-vol PCI for their higher reactivity and combustibility. Such materials are also cheaper than low-vol products.
Examples of mid-vol PCI brands include Middlemount, Peak Downs North, Poitrel and Capricorn, among others.
Apart from volatile matter, the presence of impurities such as sulfur, ash and phosphorus also come into play.
Sulfur and ash are both undesirable components because they have an adverse effect on the quality of the hot metal produced and the operations of the blast furnace respectively.
Ash also generates industrial dust, which is costly to remove.
Phosphorus content is another critical factor for steelmakers to consider when planning their PCI procurement due to the costly nature of removing this impurity.
A PCI product’s Hardgrove Grindability Index (HGI) and its ash fusion temperature are two other parameters on which it is judged.
The use of PCI goes beyond serving as a replacement for coke to ensure cost-efficient hot iron production.
The Chinese market often uses mid-vol brands such as Peak Downs North as a blending agent for the production of coke. This was evident in December last year when tight supply of “lean coal” in China encouraged the use of certain PCI brands in the coke production process, since they can be used as a substitute to lean coal.
In China, “lean coal” refers to coal with coking properties with a high swelling index and around 20% of volatile matter.
Why new PCI prices?
The influence of unexpected events on seaborne coking coal prices has been apparent over the last two years, when Chinese policy and weather-related disruptions resulted in a massive surge in seaborne prices for the steelmaking raw material.
The weather-related disruptions of 2017 resulted in the North Asian market - Japan, South Korea and Taiwan - ditching the one-on-one benchmark price negotiations for their quarterly contract cargoes of coking coal. Instead, they started using a basket of indices to price those quarterly tonnages.
For the PCI segment, the event resulted in two major Japanese mills taking two different approaches to pricing: one stuck with the one-on-one negotiations to agree on a fixed price for the upcoming quarter while the other negotiates the price as a percentage of a contract price for premium hard coking coal.
Many market participants have told Metal Bulletin that the launch of two new PCI indices would allow them to better track this segment of the market.
“The launch of such indices will boost the overall credibility of index-based pricing in the segment, allowing buyers and sellers to have sufficient reference points to agree on the acceptable premiums or discount,” a buyer source in North Asia said.
For this segment of the market, Metal Bulletin will apply the same transaction-based methodology that it applies to the four daily coking coal indices that it has been publishing since 2013.
The specification, which mirrors that of a typical low-vol PCI product, was decided upon based on market feedback.
To enhance the liquidity pool of the data that feeds into the index, mid-vol brands will also be used as inputs and normalized based on a regression analysis of the preceding two months’ transaction and non-transaction data.
Trades will be assigned their full weighting while non-transaction data will be assigned the minimum weighting of 10,000 tonnes.
Non-transaction data will also be used for the calculation of the index and may affect its movement on days when no trades are done but bids, offers and assessments provide a clear indication of a change in the market.
Metal Bulletin will from time to time explain the movement of the index in its daily coking coal market commentary to enhance transparency.
Metal Bulletin launched two daily indices for pulverized coal injection (PCI) products - cfr China and fob Australia - on Monday September 10 to provide the market with a representative gauge of where spot trades are being concluded.