Outlook shaky as US domestic met coal talks loom

US coking coal market participants are weighing up an uncertain outlook as domestic fundamentals falter and steel prices drop just weeks before negotiations for 2020 domestic supply contracts are due to begin.

US coking coal producers are yet to receive any 2020 requests for purchase (RFPs) from local steelmakers, but expect them to materialise in the next few weeks at which point talks will begin in earnest. Negotiations for domestic supply contracts for the coming year used to take place in the autumn, but have crept earlier in recent years as competition for the most popular coals has intensified — particularly within the high-volatile type A (HVA) bracket.

That competition was still fierce at this time last year, with some overseas buyers stepping forward early to lock in supply of their preferred brands. But the past 12 months have seen the US market stumble, with European coking coal demand flagging and domestic finished steel prices slumping in recent weeks.

The Argus US Midwest assessment for hot-rolled coil (HRC) is at $521.75/st today, down by $13.75/st from last week. And data from the American Iron and Steel Institute (AISI) yesterday confirmed that steel capacity utilisation rates fell to 80.5pc in the week ending 22 June, down from 81.1pc the previous week. Although it should be noted that rates were still up from 77.4pc a year earlier.

Concerns intensified last week as US Steel announced plans to idle three blast furnaces — two in the US and one in Europe — just months after it saw enough strength in the market to restart idled blast furnaces at its Granite City facility in Illinois. "That announcement has really knocked peoples' mindset," one local coking coal producer said.

Just north of the border, a Canadian mill has lately been looking to sell 40,000t of metallurgical coke, keen to offload excess raw materials. No similar activity has been seen in the US, but market participants said they are not surprised to see a North American mill selling off met coke given how dynamics are unfolding.

A market participant noted that one Alabama-based coke plant is on shaky ground with 10pc of its ovens not operating at the moment. Those coke plants in weaker condition are unlikely to survive the surplus, he said, also voicing concerns about a historical lack of investment in certain plants putting them in a particularly vulnerable state.

Another US coking coal producer commented that the dominant narrative for some time has been that the US met coke market is tight and, if anything, it is most likely to tip towards a deficit. But in reality the foundations of a slight oversupply have been developing for some time and it is no surprise to see signs of excess coke in the market, he said.

Expectations broadly flat on 2019

Overall, US coking coal producers appear to agree that tonnages sold under 2020 domestic supply contracts are likely to be similar — or maybe just slightly below — those sold for 2019. But buyers are yet to show their hand regarding projected tonnes required.

In terms of pricing, sellers enjoyed steep price growth last year thanks to buoyant market conditions. Price levels varied depending on the counterparties and grades, but some cited a year-on-year increase in excess of 40pc. That growth is not expected to be repeated in 2020, but most sellers hope to at least match last year's levels — particularly given that overall their export options are still robust, particularly in Asia-Pacific and South America.

One US producer previously confirmed selling some low-volatile coking coal to a domestic mill for 2019 on an index-linked basis, flouting the convention of settling these contracts on a fixed-price basis. As yet there are no clear indications as to whether linkage to fob Hampton Roads indexes will further permeate the domestic market, but nor has it been ruled out for 2020.

The Argus daily fob Hampton Roads assessment for low-volatile coking coal is at $172.70/t fob, down by 30¢/t from yesterday. The high-volatile type A (HVA) assessment is down by 30¢/t as well, to $189.70/t fob Hampton Roads, while the high-volatile type B (HVB) index fell by a similar amount to $152.20/t fob.