Coking coal supply disruptions hit Europe

European mills are facing mounting disruption to their coking coal supplies, driving some buyers to book prompt Australian cargoes at higher prices to ensure that they can maintain sufficient stocks in the first quarter.

A handful of Australian cargoes for January-February have traded into Europe at around $260/t fob Australia in recent days for premium hard low-volatile coking coal. Widespread tightness of prompt availability, supply disruptions in Poland as well as perceptions of logistical hurdles in the US limiting its spot supply have left European buyers with few alternatives to Australian coals.

These prices are not surprising given the urgency of the situation facing some European buyers, a market participant on the supply side said, adding that prices in general are moving up nearer to the $260/t fob mark. Offer levels have risen to $288/t fob Australia and bids at around $240/t for premium mid-volatile cargoes on trading platform Globalcoal.

The Argus daily fob Australia assessment for premium hard low-volatile coking coal rose by $7/t today to reach $260.35/t.

Australian coking coal shipments take significantly longer to reach European mills than those from Poland, Russia and the US. But with few options for those European mills that urgently need cargoes, particularly if they need specific grades, Australian sellers are able to negotiate prices up.

Not all European mills have spot requirements. Exposure to the disruptions vary and also depend on how well stocked they are, their location and the typical make-up of their coking coal supply in terms of grades and origins. But for those affected it is creating challenges. One mill official said they are "working overtime" on logistics in order to maintain steady arrivals of coking coal amid the disruptions.

Opinions differ as to the severity and longevity of the disruptions, particularly with regard to the US. Polish supply disruptions are likely to alleviate fairly soon and only tier two and semi-soft grades are acutely affected, a European market participant said. But other participants said all grades are affected to some extent and Australia and US supply problems will probably remain acute in January, or worsen if La Nina wet weather disrupts Australian operations in the new year.

A perfect storm

Disruptions have been ongoing in Australia, Poland and the US, and the possibility of more wet weather in Australia is adding an extra level of urgency as buyers are keen to lock in their extra cargoes before the end of the year.

Coal exports out of Australia's east coast have been hampered by congestion for several weeks now, pushing up prices and unnerving end-users, with industrial action at Glencore's Hunter Valley having also aggravated concerns. Buyers' concerns are unlikely to ease in the near-term, with union workers at the Port Kembla Coal Terminal (PKCT) in New South Wales set to begin industrial action next week, and Australia's Bureau of Meteorology yesterday forecasting that Australia will experience higher-than-average rainfall in January-March owing to the La Nina weather pattern, which would signal disruptions to mining operations.

Looking more locally, the Polish government has asked some domestic mining firms to prioritise coal supplies to state-owned power plants. This has dented the availability of material to steelmakers, with ArcelorMittal Poland noting earlier this month that it would be increasing imports in order to make up the deficit.

A trade union spokesperson aligned with a Polish metallurgical coke plant said they have not been alerted to a coal supply problem at the facility, indicating that for the time being enough material is making its way through and coke production can continue as normal.

But the added strain on Poland's coal network is also affecting the availability of regional rolling stock. A regional mill noted that wagons are being prioritised for local use ahead of exports, resulting in some train cancellations and delays to railings of Polish coking coal to plants elsewhere in Europe.

The picture in the US appears mixed, with some describing recent delays to cargoes into Europe while others refute claims of severe disruptions. US availability of some grades for January-February is tight following the latest round of purchasing, according to several market participants. And a supply response from the US is limited by pockets of congestion on its eastern railroads that has slowed service to some coal regions and is limiting upside capacity for exporters.

Hampton Roads, Virginia ports thermal and coking coal exports hit a 41-month high at 3mn t in November, but this is still short of demand. That said, market participants on the shipping side say operations are running smoothly at Hampton Roads.

In terms of US production, recent issues with longwalls may have temporarily dented volumes and limited short-term availability of coking coal for export. Coal production at ERP Compliant Fuel's Oak Grove mine in Alabama fell to 385,875 short tons (350,059 metric tonnes) in July-October, down from 435,962st in the second quarter and 547,016st in the first quarter. Meanwhile, Consol Energy has moved a longwall to a different panel at its Bailey mine in Pennsylvania. The mine produced 2.76mn st of coal in the third quarter, lower than the 3.14mn st and 3.1mn st it produced in the second and first quarters, respectively.

Freight rates offer scope for savings

European mills buying spot January-February Australian cargoes this week could make some savings on transportation costs, if they wait until next month to lock in freight rates.

Freight rates globally are at multi-year highs, and they are currently gaining a further boost from seasonal factors, with the fourth quarter typically being the highest point of the year. Argus assessed Capesize freight rates from Queensland to Rotterdam at $17.10/t on 19 December, and at $14.50/t from the US east coast to Rotterdam.

But rates typically slump in the first quarter, and the declines can be steeper when rates are falling from particularly high fourth quarter levels — such as the multi-year highs currently being seen. Initial fixtures for January already indicate that the freight market is poised for a sharp decline, with Port Hedland-Qingdao rates being locked in at below $10/t.

Any such savings on freight rates would be unlikely to fully offset the impact of European buyers booking Australian coking coal at elevated fob prices this week. But they could go some way towards softening the financial impact, and making those cargoes a more viable option.