COKING COAL QUARTERLY: Japanese mills set to pay more amid supply concerns

Japanese buyers of seaborne coking coal will have to pay a higher price for their January-March volumes in comparison with the preceding quarter, with the emergence of fresh supply concerns last month leading to an uncertain outlook for prices in the coming quarter.

Metal Bulletin’s fob Australia Premium Hard Coking Coal Index averaged $236.07 per tonne over the December-February period, up 23% compared with $191.93 per tonne during the September-November stretch.

Japanese buyers are set to price their March-quarter volumes using the average of a basket of premium hard coking coal indices during the December-February period.

The higher traded levels over the last three months have mainly been a result of tight supply, which supported prices in February despite the absence of China, the largest buyer in the spot market, for a large part of the month.

Metal Bulletin’s fob Australia premium hard coking coal index stood at $235.84 per tonne on Tuesday March 6, compared with $216.94 per tonne on February 1.

Aurizon throughput
While much of the supply concerns over the past three months stemmed from long vessel queues at Australia’s Dalrymple Bay Coal Terminal, they have now moved further upstream.

The concerns were stoked last month when Australian coal rail freight operator Aurizon announced a potential reduction in its annual throughput.

Coking coal miners in Australia use the rail network maintained by Aurizon to transport their output from mines to ports. From there, their coking coal is shipped to various parts of the world.

“On January 30, Aurizon advised the coal supply chain that it would progressively introduce changes to align its operating practices and business decisions with the requirements of the Queensland Competition Authority’s Draft Decision,” it said on February 12.

The operator said the net impact of initial changes could reduce system throughput by approximately 20 million tonnes annually, adding that “further changes are likely to be implemented, with potential to further reduce volumes.”

It now expects to transport 210-220 million tonnes of coal via its rail network during its financial year ending June 30, which is lower compared with its previous guidance of 215-225 million tonnes.

“This latest announcement shows Aurizon is willing to use its power as the monopoly operator of the network and further highlights why the regulatory process needs to be followed to maintain a level playing field,” Ian Macfarlane, the chief executive of the Queensland Resources Council (QRC), said in a statement following Aurizon’s announcement.

“The QRC is calling on Aurizon to step back from its decision and is seeking reassurances from them to instead engage constructively with the regulator to review any concerns with maintenance,” he added.

The potential loss of throughput was dubbed by a supplier source as having an impact “similar to a cyclone event.”

In April last year, disruptions to rail services connecting mines to the ports in Queensland, which cut supply by roughly 10 million tonnes, resulted in seaborne coking coal prices surging to $300 per tonne fob Australia.

With memories of those disruptions still fresh, market participants are keeping a close eye on how the potential reduction in Aurizon’s throughput would affect seaborne supply in the coming months.

“Rail allocation contracts are agreed for multiple years between miners and the freight operator and the allocation used at any given point could vary,” a seller source said.

“The use depends on a number of factors, including performance of the mines and [the fact that] not everybody uses all the railings allocated to them all the time,” he added.

Another seller said that there was likely to be some impact if Aurizon reduced its throughput capacity, though he had doubts about the reduction amounting to 20 million tonnes per year.

“The move will affect Aurizon’s earnings as well so we will have to see how it is implemented,” he added.

The source warned, however, that any reduction in Aurizon’s throughput would result in a longer recovery time should a weather event take place.

A third seller source said that it had “a number of train cancellations last month,” but did not quantify their impact on its coking coal exports volumes.

A steel mill source in India said that miners had issued warnings of “reduced rail allocations following the decision from Aurizon.”

But the source did say how many tonnes of supply would be affected as a result, though he added that “20 million tonnes per year of reduction in throughput seems high.”

Despite these uncertainties, buyer sources have yet to come up with firm plans to increase the share of alternative supply.

“With seaborne prices rising above $200 per tonne fob Australia since last year, supply has emerged from places like the United States. Even Mozambique has been ramping up [production] so the conversations on alternative supply began much earlier than when the Aurizon issue came to the fore,” another Indian buyer source said.

Vale, which produces metallurgical coal in Mozambique, reported an output of 6.95 million tonnes of the steelmaking raw material last year, compared with 3.48 million tonnes in 2016.

US coking coal exports rose to over 40 million tonnes last year – the first year-on-year rise in export volumes over the past five years.

Another source in India said that the absence of concrete plans to increase the share of alternative supply stemmed from the uncertainty about whether Aurizon would follow through with its decision to cut throughput.

“Besides, Australia boasts of having the best-quality coking coal resources and its geographical proximity to Asian markets makes it a difficult supplier to replace easily,” he added.

Chinese demand
Market participants in China have so far downplayed the potential impact of Aurizon announcement on the seaborne coking coal market. They insist that their decision to import seaborne coking coal will continue to be a function of the price gap between domestic and imported materials.

Domestic prices in China eased slightly last week for lower-ranked materials, though market participants have indicated that the supply of products with low-sulfur and low-ash content was tight.

Metal Bulletin’s assessment of domestic hard coking coal in China delivered to Tangshan stood at 1,500-1,950 yuan ($237-308) per tonne on March 2, down 70 yuan per tonne on the lower end of the range compared with a week earlier.

This is the first downward movement witnessed in China’s domestic market this year.

“Prices for premium materials in China remain supported due to tight supply, which is expected to last for at least two more weeks after the ‘twin sessions,’” a coke plant source said.

The annual meetings of the China’s 13th National People’s Congress (NPC) and its National Committee of the Chinese People’s Political Consultative Conference (CPPCC) commenced on March 5 in Beijing.

Metal Bulletin’s cfr China Premium Hard Coking Coal Index stood at $234.88 per tonne on March 6, compared with $211.31 per tonne on February 1.

“We are bullish about raw materials prices for the month of March on the back of higher steel prices. Mills in Hebei province had scheduled maintenance [in February] but it looks like they will postpone it in the wake of high steel prices.

“They are prioritizing output as far as I am concerned,” a trader source in China said.

Metal Bulletin’s assessment of domestic prices for rebar in east China was 3,920-4,000 yuan per tonne ex-warehouse on March 6, compared with 3,830-3,890 yuan per tonne on February 1.