The price
downtrend that dominated the seaborne metallurgical coal market in the second
quarter looks set to extend into Q3, with construction activity expected to
slow down in both China and India in coming weeks due to the rainy season.
However,
prices also have the potential to remain highly volatile as western countries
mull further sanctions on Russia and China grapples with how to revitalize its
economy in the wake of COVID-19 lockdowns.
The
benchmark Platts premium low-volatile hard coking coal price on an FOB
Australia basis fell $213/mt quarter on quarter to end Q2 at $302/mt, while the
PLV CFR China price fell $46.25/mt over the same period to $394/mt, S&P
Global Commodity Insights data showed, amid increased spot supply and decreased
steel demand.
Falling
global steel prices were a key driver of the sharp fall in seaborne met coal
prices in Q2. Hot rolled coil prices in India, Germany and the US fell 40%, 23%
and 20% quarter on quarter respectively in Q2, S&P Global data showed,
while weaker steel prices prompted production cuts in markets that use
Australian coals, including Europe, India and Japan.
In China,
domestic prices of HRC and rebar fell 12% and 10% respectively in June, while
the domestic steel profit margin turned negative in late April and remained in
the red for much of Q2. Both domestic HRC and rebar margins were estimated at
minus $67/mt June 30.
Spot liquidity rises, but still lower than 2021
The observed
spot transaction volume for Q2 was 2.23 million mt, up 33% from Q1, as
Australian mining companies typically sell more spot material to meet fiscal
year-end targets in June. Some cargoes were resold by end-users amid weakening
downstream steel consumption. The equivalent of one full Panamax Australian
PHCC cargo was sold by end-users in the three months to end June, compared with
one cargo every five months in 2021.
The outlook
for Q3 liquidity could swing as the increase in spot offers could be partially
offset by a seasonal decrease in demand from both China and India, where Q3
typically marks the rainy season, which slows construction activity. Some
market participants said spot liquidity could also depend on the interplay
between met and thermal coal, as more PCI and semisoft coking coal may be
switched to thermal coal in Q3 if the latter pays better during the peak summer
demand season.
More Russian coal for China, India
An imminent
European ban on Russian coal exports resulted in more Russian tonnage flowing
to China and India in Q2. China’s imports of Russian met coal surged 89% year
on year to a record high 3.42 million mt over April-May, customs data showed.
India reportedly imported 1.06 million mt of Russian PCI over April-May, up
220% year on year, according to iEnergy Natural Resources. Russian PCI
accounted for around 44% of India’s PCI imports over January-May, up from 30%
in the same period a year earlier.
The surge in
Russian met coal exports to China and India was due mainly to a significant
price discount of up to 50% relative to Australian coal on expectations of a
European ban on Russian coal, which forced spot trade flows to shift away from
traditional markets like Japan, South Korea and Taiwan, as well as Europe.
Consequently, some Indian buyers were heard to have reduced Australian PCI term
contractual volumes in 2022 amid increased Russian supply.
The increase
Russian exports to China and India could be sustained in light of new payment
methods emerging. Telegraphic transfer is being used, with first payment after
the contract is signed and the balance upon sight of shipping documents. Some
Russian miners were also heard to be accepting Yuan to Russian banks and US
dollars to Swiss banks, according to some sources.
Relative value increases for lower-grade coal
The value of
pulverized coal injection coal and semisoft coking coal in relation to PLV has
strengthened since the invasion of Ukraine, with the PCI-PLV spread and the
semisoft-PLV spread remaining elevated at end June.
Market participants expect the spreads to normalize toward the historic average
in Q3 amid falling markets across the board, but also anticipate increased
volatility as the impact of the Ukraine war on thermal coal and global energy
commodity markets continues.
Tight spot availability in the PCI and semisoft coking coal segments in Q2,
coupled with a strong thermal coal market, led to an historic high relativity
of 106.65% on May 30 for PCI and a record 92.37% on May 25 for semisoft coking
coal. This compares with their average relativities of 73.2% and 65.41% since
October 2011.
“It’s a tale
of two coals, but clearly they’re entering two different scenarios and hence
could decouple in Q3,” a market source said, adding that thermal coal prices
typically remain strong in summer while met coal demand weakens due to the
rainy season in Q3.
China a wild card for Q3
The
interplay between China and the international market has been closely watched
since prices fell in May. More spot offers from the US to China have emerged
since late May basis CFR China. Many in the market compare the relative
strength of price for arbitrage opportunities, and as FOB Australia was falling
at a faster pace, China became relatively more competitive. The PLV FOB
Australia price was assessed at $302/mt June 30, compared with a netback value
of $370.60/mt for PLV CFR China minus spot Panamax freight.
However,
China’s domestic ferrous markets falling rapidly in recent weeks adds growing
uncertainty to those betting on China as a better-paying market. Chinese steel
mill margins for rebar and HRC were estimated at minus $70/mt June 30. In fact,
based on S&P Global calculations, mills’ profit margins were mostly
negative throughout Q2, which resulted in sharp price falls in ferrous scrap,
iron ore, met coke and coal by 47.61%, 24.87%, 37.08% and 17.63% on the
quarter, respectively.
“Much of the
Q3 outlook will depend on China, which can serve as a floor to the
international market,” a sell-side source said.