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© Copyright The Steel Index 2016 /1
TSI Market Watch: Coking Coal October 5th, 2016
2016 has seen coking coal prices experiencing an order of resurrection that could make Lazarus jealous. This little-watched commodity has re-emerged blinking onto the media stage as the year’s best performing commodity, attracting column-inches not seen since Australia’s ‘Great Floods’ of 2011. The scale and speed of the rise have astounded observers, with industry veterans shaking their heads all the way up, in shock or disbelief. It’s all been a bit biblical, really.
Back In Black: Premium Hard Coking Coal (PHCC) soars
TSI’s PHCC FOB Australia index had until recently been following its own highway to hell, on a
near continuous falling trajectory since launch in 2013, with the lowest-ever print being
US$73.4/t on November 2015. It had been languishing in a narrow US$70-80/t range between
October 14th, 2015 and March 4th, 2016.
This period of low pricing disincentivised all but the lowest cost producers from supply, which
heavily impacted US companies, with many posting Chapter 11 bankruptcy notices. Suppliers
remaining in the game required a stiff upper lip to keep shipping. Mining conglomerate Anglo
American put potential buyers on notice that it was looking to divest its coking coal assets.
There had already been a recovery earlier in the year, which was somewhat driven by rain-
related supply disruptions, but mainly by an enormous surge in Chinese steel prices, which
moved up by 69.9% from where they started the year. The effects of rising Chinese steel prices
rippled around the world, as steel producers in other regions felt decreasing pressure from
Chinese imports giving them room to raise steel prices.
Steel price surge led coking coal’s initial recovery
The global steel price recovery spurred demand for coking coal not only in China, but also in the world’s other steel producing countries.
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PHCC FOB Australia ASEAN HRC
Source: TSI Benchmark indices
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© Copyright The Steel Index 2016 /2
With demand up, Australian PHCC managed a 25.2% price increase from the beginning of the
year, to the absolute high point of ASEAN HRC prices seen on April 22nd. The ASEAN index
represents imports of Chinese-origin hot-rolled coil, so is a direct proxy for Chinese FOB prices.
Chinese demand for coking coal imports improved in 2016 (Jan-Apr averaged 4.8 million, vs 3.7
million tonnes per month in 2015), taking some slack from excess Australian supply. But coking
coal-short importer demand was key (India, EU, Asia ex-China), as were supply disruptions.
TSI FOB Australia Premium Hard Coking Coal (PHCC) index puts on 130.7% since July 1st
Even as steel prices have waxed and waned, coking coal has entered a turbo-charged period
since August. Whilst the story for many years has been oversupply, buyers increasingly
discovered how tight the spot market has become.
Spot market supply is fairly tight in the coking coal market at the best of times; now there are
fewer alternative supply sources outside of Australia able to act as a pressure valve for buyers.
With a wall collapse at South 32 causing them to declare force majeure, Anglo American’s
German Creek mine having had industrial action affecting it; and Glencore and BHP suffering a
train derailment, the market tightened further.
In 2016, China’s coking coal import demand began rising
Whilst Chinese import volumes have been in decline since 2013 on a year-on-year basis, 2016 has seen a reversal of that trend, with most months posting an increase in imports. A bottom seems to have been found after policy dictated fewer working days in Chinese mines, which was further compounded by floods hampering China’s logistics.
Source: TSI Benchmark coking coal index, China customs data
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Chinese Imports PHCC FOB Australia
© Copyright The Steel Index 2016 /3
It all adds up to one thing, coking coal is back. It’s not just coking coal, either – Australian
thermal coal is back over US$80/t for the first time in years as a direct result of China’s moves
to curb inefficient domestic production and reduce working days.
Prices are back, so much, in fact, that new life is being breathed into coal projects around the
world. Corsa Coal in the US has been working to up production in order to take advantage of the
recent price moves and is looking at opening a new mine. US Ramaco Development is preparing
to open two new coking coal mines. Even at the ‘giant’ end of the scale, Vale’s Moatize
Mozambique project finally saw a renegotiated deal with Mitsui for a 15% stake in the mine and
50% in the logistics corridor on September 30th. That deal had been languishing since being
originally signed in December 2014: coking coal prices in two figures, rather than three, made
long-term financing difficult to obtain.
Quarterly buyers: Thunderstruck
The industry has been shifting towards more spot-market based pricing mechanisms over the
years. However, there is still plenty of premium hard and hard coking coal tonnage allocated to
quarterly prices, negotiated between buyers and sellers. So, it is worth remembering that the
majority of coking coal producers are not benefitting from this price surge, tied as they were to
a price of US$92.5/t tonne between July and September (for premium material). TSI’s price is
referenced in the majority of FOB term deals, but has also been used in floating deals recently,
by miners not usually referencing indices.
An market. Price flowed in only one direction since 2013: downwards. In 2016, that reversed.
The industry has seen round after round after round of cost-cutting by producers since 2013. Current price movements must be inducing a certain giddiness.
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PHCC FOB Australia
Source: TSI Benchmark coking coal index
US$
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© Copyright The Steel Index 2016 /4
Recently, some buyers felt that a quarterly price of US$140/t would be likely, so initial offers of
US$205/t would have been something of a shock. Those offers have expired and been replaced
with new, higher ones, of US$212/t (there is allegedly one for US$200/t, too) after spot market
sales took another leg up, enough to make negotiating buyers shake all night long.
Negotiations have already run over-time, which tells something about the difficulty the two
sides have in agreeing a number. The stakes for sellers predominantly selling on a quarterly
basis are high. They have foregone the price rally and need to reach a number that delivers on
the huge amount of upside that they have seen pass them by. For buyers, the stakes are high
too: are current prices underpinned by fundamentals, or are they simply a short-term spike?
No-one wants to be left stranded at a high level for a period of three months.
A change from US$92.5 per tonne, to something twice as high could act like T.N.T. to the
quarterly pricing system. If supply comes back into the market in a meaningful way to take spot
prices below whatever negotiated price is agreed on, it could put terminal strain on the system.
Now where?
Buyers and traders may well be ruing the fact that a liquid coking coal futures product has not
been in place to protect against price movements. During September, an average of 22,000
tonnes was traded daily on exchange – not enough for companies to hedge a single cargo daily.
That may change over the balance of the year. An institutional big gun will be entering the
market, providing two-way prices on SGX during this month.
Despite high market appetite for a liquid price-risk management tool, the coking coal market
has never had a market maker. Expectations are high and a number of traders and banks are
looking forward to trade for themselves, or clients. With the quarterly system stressed, price
risk running high and the opportunity for basis risk between physical supply contracts and
financial contracts to be eliminated, the results could be explosive.
For those about to rock, we salute you.
Ends
© Copyright The Steel Index 2016 /5
For further information
Please contact:
Tim Hard (Singapore) +65 65 306 413 [email protected]
Note to Editors:
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