Macro uncertainty complicates coke forecast

Geopolitical and pandemic-related uncertainties are having an outsized effect on the petroleum coke market, making forecasting price direction difficult, speakers said at last week's Cemprospects 2020 virtual conference.

The world's recovery from the Covid-19 pandemic is the biggest unknown. While a vaccine could be available as soon as early next year, there appear to be some long-term shifts in company policies around teleworking and business travel that will outlast the pandemic. The degree to which these changes affect coke demand will depend on the characteristics of various markets, Advisian group manager Ben Ziesmer said. In Japan for instance, reduced commuting will have little effect on gasoline demand, as most workers use public transportation. But in the US, where so many workers commute by car, Advisian expects a transition to remote work to reduce gasoline demand by 8-10pc. Most other markets will be somewhere in between, Ziesmer said.

Cembureau energy consultant Frank Brannvoll said his forecast predicts business and transport can return to almost pre-Covid levels by the second half of next year. But this assumes a vaccine becomes available. Brannvoll does not expect refineries to come back with increased coke production until at least the second or third quarter of next year. Stockpiles are very low and refineries will be focused on fulfilling term contracts at the beginning of 2021, including some rolled over from this year.

US election questions remain

The outcome of the US presidential election is another uncertainty.

Advisian expects the election could have a major effect on US Gulf coke production because of its potential to determine the fate of the long-delayed Keystone XL pipeline. If President Donald Trump is re-elected to another four-year term, Advisian expects TC Energy will finally be able to complete the pipeline bringing heavy Canadian crude from Alberta to the US Gulf. This additional heavy crude would result in a 3-4mn t/yr increase in coke production in the US Gulf by 2023, Ziesmer said. That amounts to about 10pc of annual US output. Trump's opponent, Democratic former vice president Joe Biden, opposes the pipeline.

But Argus Consulting does not share the view that the pipeline would necessarily result in so much additional coke, as there are a number of other variables that will affect refineries over the next three years.

A Democratic Party-controlled government could usher in other green policies unfavourable to coke production. Biden has pledged to focus on clean-energy initiatives, including investing $2 trillion to support renewable energy, have the US rejoin the Paris climate agreement, and restore energy regulations loosened during the Trump presidency. But Trump's administration has also made some policy moves unfavourable to refiners, such as denying dozens of requests from small refineries to waive past biofuel blending obligations. Refinery group AFPM president Chet Thompson called the move a "betrayal" of union workers at refineries that could result in the closure of some facilities. Some refiners are already turning to a chemicals focus or transitioning to renewable fuel production, which will permanently cut coke supply.

In Europe, coke production is not expected to recover until the second half of next year, and some refineries there are likely to close permanently, Ziesmer said. But these will likely be less complex refineries without cokers, unlike in the US, where coking refineries in Wyoming and California have announced closures.

Coke discount to remain rather narrow

While the supply side is complicated by unknowns such as the US election and the timing of a Covid vaccine's approval and distribution, the demand side will largely be driven by coke's discount to coal.

Coke prices have risen on extreme supply tightness as a result of inventory drawdowns early this year, lower production as refineries cut back during Covid lockdowns, and more recently shutdowns at US Gulf refineries as a result of hurricanes in the region. This rise has caused coke prices to surpass coal in nearly all regions, turning what is normally a discount for coke into a premium, on a heat-adjusted basis.

Coke may become even more expensive compared with coal in the short term, Brannvoll said, as supply will remain tight at least for the rest of this year and into the first quarter of next year. Cement plants for which it is relatively easy to switch to coal will have already done so. Some will also accelerate the switch to alternative fuels.

These shifts could be difficult to reverse in the near term, as cement buyers who have made a switch to coal will want to see a particularly large discount for coke in order to switch back. The continued tight supply in the forecast for most of next year makes such wide discounts unlikely. Brannvoll forecasts that the discount for fob US Gulf coast 6.5pc sulphur coke to the API 4 coal price on a heat-adjusted basis will widen back out next year, but only to an average of 30pc. This is the minimum of what he considers a "neutral" discount. Anything less means coke is expensive compared with coal.

Brannvoll's model shows that the average discount for coke to coal over the last 10 years has been 40pc, and the discount typically ranges between 30-50pc. For 2021, he expects it will range between 25-40pc. He forecasts the 6.5pc sulphur US Gulf fob price will average $52/t next year.

This is slightly above the $46.80/t 2021 average that Argus consultant Hayden Atkins forecast for this specification in the latest monthly [Argus Petroleum Coke Outlook](https://direct.argusmedia.com/pdfissue/get/957192) published on 1 October. But Atkins' forecast largely matches Brannvoll's. "Ultimately, we still see petcoke prices adjusting lower as the marginal tonne supplied needs to be more competitive against coal prices," Atkins wrote. "But in the interim, the risks to prices in the short term still appear skewed to the upside."

By Lauren Masterson