China's Steelmakers The Relative Winners In Coking Coal Surge: Russell

24 October 2016

While no steel maker will be happy with the explosion in coking coal prices, Chinese mills are the best placed to deal with the impact, given they are nowhere near as exposed to spot prices as competitors in the rest of Asia and Europe.

The spot price of premium hard coking coal .PHCC-AUS=SI in Australia, which dominates global exports, surged to $242.90 a tonne on Oct. 20, taking the rally so far this year to a staggering 210 percent.

While only a small percentage of coking coal cargoes are actually sold at the spot price, the quarterly contract price was recently settled above $200 a tonne and customers of Australia's BHP-Mitsubishi Alliance, the world's largest coking coal exporter, will be paying prices linked to monthly indexes.

Given that about 770 kg of coking coal is required to make one tonne of steel, the more than tripling of prices since this year's rally took off in July will be causing pain for steelmakers, who have not enjoyed nearly as large gains in their products.

However, given Chinese steel makers are far less reliant of seaborne imports than those in Japan, South Korea and Britain for example, their competitive advantage has been increasing.

While domestic Chinese coking coal prices have been rising, they are still well below the seaborne equivalents.

Coking coal futures on the Dalian Commodity Exchange closed on Friday at 1,235 yuan ($182.69) a tonne.

They are up about 119 percent so far this year, a substantial jump, but only slightly more than half what Australian spot coking coal prices have risen.

Chinese coking coal output rose 7.3 percent to 39.29 million tonnes in September from a year earlier, taking production for the first nine months of the year to 331.74 million tonnes, down 1.6 percent from the same period in 2015, the National Bureau of Statistics said on Oct. 19.

There are two main points to note from this data, firstly that coking coal has largely been spared from the cuts in domestic output that has seen China's total coal output slump 10.5 percent in the first three quarters, and secondly, domestic production accounts for the major slice of China's consumption.


Coking coal imports were 37.9 million tonnes in the first eight months of the year, according to customs data. This means that it took eight months for imports to reach roughly the same level as one month's domestic output.

While Australia is China's biggest supplier, meeting almost half of import demand, the second biggest source is Mongolia.

This gives Chinese steelmakers a further advantage as coking coal sourced from Mongolia is far less expensive than cargoes from the seaborne market, given Mongolia's mines have effectively only one buyer for their output, thereby cutting their pricing power.

Mongolia supplied 12.78 million tonnes of coking coal to China in the first eight months of the year, a jump of 51.7 percent from the same period in 2015.

In contrast, imports from Australia were 18.75 million tonnes, a gain of 8.5 percent, numbers that clearly indicate a mounting preference by Chinese steel mills for cheaper Mongolian cargoes.

Customs data for August showed a price of $93.92 a tonne for Australian coking coal and just $34.20 for shipments from landlocked neighbour Mongolia.

The numbers for September will be released next week and are likely to show rising prices, but it's extremely unlikely that Mongolian cargoes will have jumped more in percentage terms than those from Australia, thus widening the gap between the two.

Overall, it seems very likely that Chinese steelmakers are now enjoying a coking coal cost advantage not available to their competitors, especially those located in the northeast, close to both domestic and Mongolian mines.

China's benchmark steel rebar contract is up about 46 percent so far this year, a strong gain, but probably one that has been more than offset by the surge in coking coal, and iron ore, where spot prices .IO62-CNI=SI have gained 36 percent so far this year.

But while Chinese steel mills are probably seeing their profits being crimped, they won't be suffering to the same extent as many of their global competitors.

This means that cheaper Chinese steel product exports are likely to continue to force their way into global markets, which may promote further calls for protectionist measures from the losers.

It also underscores that given the limited ability of coking coal exporters to quickly ramp up production, any downward move in the price is likely to come from declining steel production cutting demand for the fuel.


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