Met coal prices hit multi-year lows in Q2 as lockdowns cut demand
Spot prices may strengthen in Q3, but recovery uncertain
China's import policy, Indian demand remain the key questions
The seaborne metallurgical coal market is entering the third quarter amid more positive demand signals, with steelmakers lifting utilization rates after a challenging Q2, when premium low-volatile or PLV hard coking coal prices fell 23% from the average price in Q1 as the COVID-19 pandemic battered global demand.
The positive demand indicators are emerging as multiple countries ease lockdown restrictions, prompting steelmakers to make up for production losses in Q2. However, some question marks remain, particularly around China's import policies and the likely strength of India's demand for coking coal.
Market consensus is that metallurgical coal spot prices are likely to be supported in Q3, with fewer price fluctuations, as ex-Chinese steelmakers receive their term tonnage allocations, leaving fewer tons available for the spot market.
Metallurgical coal demand growth outside of China is expected to be subdued, with key markets such as Japan and India taking longer to ramp up steel production.
On the supply side, a slight decline is expected in Australian metallurgical coal exports.
S&P Global Platts Analytics estimates the world's largest seaborne exporter's volumes will fall 5 million mt year on year in 2020 to 185 million mt.
This is due mainly to production impacts. Seaborne prices are likely to fluctuate ahead of supply-demand fundamentals finding a balance.
BENCHMARK PLV FOB AUSTRALIA SPOT VOLUMES RISE 44%
Metallurgical coal spot prices fell to multi-year lows across all grades in Q2 as end-user mills reduced operating rates by 30%-50%.
This resulted in a throng of cargoes being redirected into the spot market, sending prices on a downward spiral.
Premium low-volatile hard coking coal benchmark prices averaged $118.45/mt FOB Australia in Q2, down 23% from the average in Q1 and down almost 29% year on year, S&P Global Platts data showed.
Spot transaction volumes observed by Platts fell 19% on year to 21.2 million mt in Q2, but were up 44% on Q1, driven by Chinese procurement amid weak prices and excessive spot supply.
INDIA TO INCREASE MET COAL, COKE IMPORTS AMID CHALLENGES
India's nationwide lockdown that began in mid-March resulted in spot trades falling 61% on year and by 78% on quarter.
At one point, India's privately-owned mills had cut production by 70%, according to Platts estimates.
Indian mills began lifting utilization rates in June, and the country is expected to increase its metallurgical coal and coke imports in Q3 due to the uptake of term contract volumes.
However, India's monsoon season is looming, and the economy is grappling with a credit crunch and manpower limitations that will ultimately impact its need for raw materials.
India's term contractual volumes should be sufficient to cover its current steel utilization rates, therefore any substantial return to the spot market appears unlikely in the near term.
UNCERTAINTY LINGERS OVER CHINA'S IMPORT POLICIES
China's import policies are expected to become stricter in Q3 as the country strives to contain imports to around 70 million mt, close to 2017 import volumes.
The policy has accelerated demand for premium materials, resulting in a higher price realization for PLV but lower for medium and lower grade coals in Q2.
The average spread in Q2 for PMV against PLV widened 7.4% in Q2, and by 19.2% for HCC, from the previous quarter.
Chinese buyers have been scouting for alternatives, such as imported metallurgical coke, which is subject to less scrutiny by authorities as it has less influence on domestic prices.
Term tonnage of metallurgical coke was redirected to China in Q2, when the country was running low on coke supply due to production cuts and strong demand from mills.
However, such opportunities will likely be fewer in Q3, as ex-Chinese steelmakers increasingly require their coke tonnages.
According to China Customs data, China imported 150,466 mt of met coke over January-May, up 196% from the same period in 2019 and up 712% from 2018.
Source: Chinese customs statistics
BOTTOMING CLOSE FOR SEMI-SOFT, BUT HINGES ON THERMAL COAL
Spot semi-soft coking coal prices hit a record low at $58.25/mt FOB Australia in mid-June as tighter port restrictions shifted demand to higher grades.
Market participants anticipate a near-term bottoming for semi-soft prices, considering the switch ability cost from thermal coal. The outlook for Q3 hinges on the recovery in thermal coal prices.
In both Q1 and Q2, semi-soft prices were below the implied breakeven price for thermal coal, leading to a sharp fall in semi-soft deals.
Source: S&P Global Platts
Australian coal producers with coal washing facilities were incentivized to produce more thermal coal given the better returns compared with semi-soft.
Based on Platts spot data, 2020 annualized spot trade of semi-soft coking coal is estimated at 1.2 million mt. This compares with 2.7 million mt in 2019 and a 5-year average of 3.4 million mt.
To calculate the price spread between semi-soft and thermal coal, Platts normalized thermal coal prices based on 5,500 kcal/kg GAR, which is roughly equivalent to 5,200 kcal/kg NAR coal, to typical semi-soft CV specifications of 6,700 kcal/kg NAR. This assumes an average $4.50/mt conversion cost and 90% yield rate of semi-soft from thermal coal.
Yi-Le Weng, Jessie Li, Jeffery Lu
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