COKING COAL QUARTERLY: Supply disruptions set to raise Q4 contract price

Japanese buyers of seaborne coking coal are expected to pay over 10% more for their October-December volumes in comparison with the preceding quarter amid a surge in spot prices last month.

While these Japanese mills used to negotiate a contract price with coking coal producers every quarter, a breakdown in talks following supply disruptions in the wake of Cyclone Debbie - which hit Australia’s coal-producing hub of Queensland between late March and early April - led to a switch to an index-linked pricing mechanism.

The most-widely adopted formula incorporates the average of a basket of indices, and for tonnages delivered in April-June, an average of indices over the March-May period was adopted to price them. Since then, the same formula using this one-month lag has continued.

This means fourth-quarter contract prices will be determined by an average of indices in the three months to November.

Metal Bulletin’s fob Australia Premium Hard Coking Coal Index averaged $191.93 per tonne over the September-November period, compared with $169.51 per tonne during the June-August stretch.

From September 4 to November 30, Metal Bulletin observed just over 100 index-eligible fixed-priced spot transactions, which accounted for over 8 million tonnes of premium hard coking coal, hard coking coal and pulverized coal injection (PCI) materials.

September: Unrealized expectations
Restrictions on the movement of trucks at north China’s Jingtang port that went into effect on August 15 dulled demand for seaborne coking coal, as Chinese end-users began switching to domestic materials.

However, a series of accidents at mines in the country around the same time heightened scrutiny on domestic mining operations.

Rising prices in the domestic coking coal market created an arbitrage opportunity for buyers unaffected by the trucking restrictions - demand from these buyers gave support to prices for seaborne materials.

At the same time, Chinese mills’ high profit margins resulted in higher coke prices, which in turn provided further support to the coking coal market.

Between late June and mid-September, prices for domestic coke in China rose nine times.

Metal Bulletin’s fob Australia Premium Hard Coking Coal Index averaged $203.42 per tonne in September, up from $197.35 per tonne in August.

October: Demand weakens
Chinese government policy once again came into focus as the 19th National Congress of the Communist Party of China convened in October.

While nothing that would significantly affect the ferrous sector was announced at the meeting in Beijing, steel and coke production cuts were implemented ahead of it in the neighboring city of Tangshan and other surrounding regions.

Expectations started growing about seaborne coking coal prices easing from September levels as Chinese demand dried up.

The decrease in steel and coke production allowed Chinese end-users to delay their procurement plans, resulting in seaborne coking coal prices sliding slowly but steadily.

A warning issued by Australia’s Bureau of Meteorology about the potential for extreme weather in the country’s eastern region in the coming months also failed to boost coking coal prices.

Metal Bulletin’s fob Australia Premium Hard Coking Coal Index averaged $183.50 per tonne in October.

November: Supply woes
The three months to November saw market participants swinging between bullish and bearish like a pendulum.

Government policy in China restricting the import of coal and curbing domestic steel production had a significant effect on demand and prices for seaborne coking coal during the period.

Domestic coking coal prices in China, which experienced limited downside after the national congress in October, had also been a source of support for the seaborne market.

But the most significant factor that affected prices during the period was limited spot supply from Australia due to congestion at the Dalrymple Bay Coal Terminal in Queensland.

As the supply of premium hard coking coal fell, traders began picking up whatever available cargoes in the spot market at higher prices in November.

Market participants also cited robust demand from ex-China buyers whose inventories were running low as a result of having sat out of the spot market for a significant period prior to November.

Bids for cargoes of premium materials breached $200 per tonne fob Australia toward the end of the month.

Metal Bulletin’s fob Australia Premium Hard Coking Coal Index rose to $210.97 per tonne on November 30, its highest since early May and $32.89 per tonne higher than that at the start of the month. The index averaged $189.52 per tonne last month.

“The high profit margins that mills are making and the increased optimism among Chinese market participants as reflected by the futures surge [on the Dalian Commodity Exchange] will continue to support seaborne coking coal prices,” a Chinese mill source said.

A second Chinese mill source pointed out that coke prices had rebounded.

“[They] went up by 100 yuan per tonne in the second last week of November but coke plants have just proposed a second round of increases that will most likely be accepted by mills,” he added.

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