Over a year has passed since China imposed an informal ban on Australian coals. What is China's stance today and what has been the impact on the wider market?
Join Siew Hua Seah, Europe Editor, Argus Ferrous Markets, and Brendan Kjellberg-Motton, Reporter - Coking Coal, as they explore the impact on US, Canada and Russia coking coal. Our speakers will also dive into the prices and share thoughts on industry sentiment towards China's restrictions.
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Siew: Hello, and welcome to this podcast brought to you by Argus Media, a leading independent provider of energy and commodity pricing information. In this episode of "Metal Movers," we'll be discussing China's granting of customs clearance on coal cargoes and the impact on U.S. coking coal prices. My name is Siew Hua Seah, Europe editor for Argus Ferrous Markets at Argus Media. And I'm joined by my colleague, Brendan Kjellberg-Motton, our Coking Coal reporter at Argus Media.
So it's been just over a year since China had imposed an informal ban on Australian coals, and since then, Chinese mills have turned to the U.S., Canada, and, increasingly, Russia as alternative supply sources. So this has, of course, resulted in U.S. coking coal prices reaching never-seen-before highs, but the average price of the Argus-assessed U.S. low-vol coal in the last 6 months at around $255 FOB more than doubled the price it was in the 6 months preceding the ban in October last year. The premium hard coking coal fob Australia price fell to its lowest since July 2016 at $98.75 in late November last year. That supply tightness in Australia and strong demand from the rest of Asia has meant that, actually, the fob Australia price has maintained its strength over the course of this year and consistently hit record highs alongside U.S. prices.
Brendan: Much like Australia where supply tightness has limited the downside in fob prices despite the absence of Chinese demand, U.S. coking coal is in short supply. And although historically high prices are providing plenty of incentive for miners to raise output, some have not been able to do so, or not significantly. And the U.S. coal industry is faced with labor shortages on the production and the transport side, as well as a more hostile environment in terms of investment. And while miners have largely managed to raise outputs significantly since last year when production was welling down swiftly in response to COVID-19, in many cases, they're producing significantly less than in 2019.
Siew: So I think we're still...you know, there's still some encouraging signs among larger U.S. miners with the financial muscle to expand capacity, and guys like Arch, Consol, Alpha, and actually, today, Peabody, which has announced plans to restart, show great coking coal mine. So they'll start producing high-vols next year and then premium hard coking coal in 2023. But back to China, so late last week, China eases its stance on Australian coal mostly because of the high pressure on its coal-fired power generation capacity ahead of the winter. So China started to clear Australian coal that was discharged at Chinese ports. And while this largely affects thermal coal, the move will likely free up about 4 to 5 million tons of coking coal. So these cargoes that qualify for discharging are very much restricted to the ones that entered the custom system prior to October last year.
Brendan: The amount of coking coal to be released equates to roughly a month of China's consumption of these types of coals. And U.S. supply is already looking tight for the first quarter. So there's room for these coals to be consumed without exerting significant downward pressure on U.S. prices. Suppliers do expect the decision to prevent any price increases in the near future. But as mentioned, prices are already at record highs, and as a standalone event, this won't change the supply-demand balance. And these cargoes will go directly to end users. So in effect, they've been taking out of the market because, from time to time, in recent months, mills outside of China have turned to resold stranded cargoes. So if anything, this decision might lend support to the fob Australia market.
Siew: So it should also be noted in the past year that, while there are, you know, consistently market rumors that China may ease restrictions on Australian coals every few weeks, we do see major producers, such as BHP, expecting this informal ban to last for, you know, a few years, at least. So, how are prices likely to respond? We're, essentially, still in a high price environment, with fob Australia over $400 at the start in November and premium low-vol coal available from the U.S. and Canada. The tier 1 CFR China price is currently assessed at over $610 a ton, putting the equivalent fob U.S. price at around just under $550. So I would say that U.S. miners are still very confident going into the first quarter and also to start next year's term contract discussions with European mills. And more importantly, we have to remember that China's decision to discharge cargoes this time is driven by its power generation needs, and coking coal just happened to be a beneficiary.
Brendan: Yeah. And U.S. supply remains fundamentally tight, and this has been indicated by the fact that recent requirements for November loadings of U.S. coking coal have been met by offers for late December or January. And spot availability is largely limited to January or later now. Ongoing rail shortfalls in the U.S. will limit the miners' ability to offer tons. And one major producer has indicated that much of the first quarter will be spent focusing on making up for delayed rail shipments to domestic mills. As far as prices are concerned, it's worth remembering that, last week, before Chinese restrictions were eased, U.S. premium low-vol coals were being offered in the 620s CFR China, which was another $10 above the latest deals. And so this would indicate that miners fundamentally see room for more upside. In Russia, railways have been a major bottleneck this whole year largely because increased demand from China caused an abrupt change in transport flows, which led to a shortage of rail cars that escort many suppliers out. Russian suppliers are struggling to meet contract obligations into Europe, and spot offers into China are very limited. The onset of winter, of course, will only exacerbate the shortage. So little improvement in supply can be expected in the next few months. In China, production was halted at least 60 coal mines in the Shanxi Province earlier this month, following heavy rainfall, while repeated surges in COVID-19 cases in Mongolia this year have limited China's Mongolian imports. And the acute shortage of thermal coal has led now to some lower grades of coking coal being used for power generation. So China's supplies graze can be expected to continue in the foreseeable future.
Siew: So overall, we're still likely to see a bullish coking coal market, at least for the first half of next year, and with supply continuing to be tight, a significant flow still remains for U.S. coal. Chinese buyers have also, in the last year, adjusted their consumption and will probably continue to look to the U.S. as a key supplier going forwards. We already see this for a number of U.S. miners to iron discussions with Chinese mills for longer-term supply arrangements next year, too. So that's it from us today. And if you enjoyed this podcast, please tune in to other episodes to learn about the metals market. And for more information about coking coal, please visit argusmedia.com.