Discounts to API 4 for lower grades of South African coal have fallen to record levels, driven by subdued demand for lower-calorific-value (lower-CV) material. But based on historical price relationships and given how high API 4 prices are, NAR 4,800 kcal/kg and NAR 5,500 kcal/kg outright prices appear to be in line with typical trends.
Argus assessed the fob Richards Bay differentials to API 4 for June-July loading NAR 4,800 kcal/kg and 5,500 kcal/kg coal at minus $24.70/t and minus $51.90/t, respectively, on 27 May. These are the widest spreads since Argus began assessing these grades as differentials in September 2019 and down from March averages of minus $17.81/t and minus $0.94/t.
Some cargoes of very prompt-loading NAR 4,800 kcal/kg material are changing hands at even steeper discounts, sources said. Last week, a NAR 4,800 kcal/kg May-loading cargo traded at about $200/t cfr India, while a June-loading 50,000t shipment was offered on 30 May at $180 cfr east coast India. Both of these cargoes are too prompt for inclusion in the Argus index.
Low demand from key buyers in south Asian markets such as India and Pakistan has weighed on the discounts in recent weeks. Buyers have been reluctant to pay high seaborne prices given inflationary pressures and concerns over input costs. The upcoming monsoon season and associated demand slowdown, coupled with the emergence of cheap Russian alternatives, could be further headwinds for demand.
India's January-April coal imports totalled 43.5mn t, down by 7mn t on the year, according to shipbroker Interocean's data. Shipping data show Pakistan's January-April thermal coal imports at 3.2mn t, down by 2.3mn t on the year.
But the Indian government has asked state-controlled producer Coal India to aggregate and import coal for the blending requirements of [all domestic power utilities] (https://direct.argusmedia.com/newsandanalysis/article/2336389). And Argus Consulting forecasts that Indian thermal coal imports will rebound to 176mn t this year, up from 140mn t last year. Additionally, South African NAR 5,500 kcal/kg coal should be insulated to a certain extent from the low Indian demand, given the sponge iron sector's preference for specific South African material.
Price ratios in line with historic norms
Despite the record differentials, NAR 4,800 kcal/kg and 5,500 kcal/kg prices on an outright basis remain elevated by historic standards and well above production costs for producers.
And when viewed in the context of the price relationship to NAR 6,000 kcal/kg coal, then NAR 5,500 kcal/kg and NAR 4,800 kcal/kg material does not appear particularly discounted.
Based on 27 May outright price assessments, Richards Bay NAR 5,500 kcal/kg coal was 78pc of the value of NAR 6,000 kcal/kg. This is close to the 2013-22 average ratio of 80pc and within the historic range of 66.6-91.8pc (see chart).
NAR 4,800 kcal/kg coal was assessed at 61pc of the value of NAR 6,000 kcal/kg product, in line with the 2019-22 average of 60pc and within the historic range of 49-70pc.
The 6,000-5,500 kcal/kg price spread for South African coal is actually much narrower than the equivalent spread for Australian product. Argus assessed fob Newcastle NAR 5,500 kcal/kg coal at $196.72/t on 27 May, a $202.27/t discount to the 6,000 kcal/kg price. The equivalent Richards Bay spread was just $77.19/t.
NAR 5,700 kcal/kg differentials tight
Discounts to API 4 for Richards Bay NAR 5,700 kcal/kg coal have been more resilient to lower grades and remain some way off historic lows of about minus $10/t. Prices have been supported by tight supply and firm demand, including recent purchases from South Korean utilities.
But differentials have still come off in recent weeks, having traded at large premiums to API 4 for much of this year.
Argus assessed the NAR 5,700 kcal/kg differential at minus $2.25/t on 27 May. The outright NAR 5,700 kcal/kg to 6,000 kcal/kg ratio was 0.92, in line with the 2019-22 average.
