Coking coal supply risk as Aurizon delays QCA ruling

Logistical challenges in delivering coking coal from Australia mines could keep spot prices supported to the end of this year, after rail operator Aurizon further delayed a ruling on its maintenance scheme that may have provided some relief to strained rail networks in Queensland.

The Queensland Competition Authority (QCA) agreed at the request of the rail operator to delay a final decision on Aurizon's 2017 draft access undertaking agreement scheduled for 20 September until after a judicial review is completed. The Supreme Court of Queensland will begin hearings on the matter from 22 October, which could push a final resolution into 2019.

The QCA said it was "disappointing" that Aurizon Network had asked the QCA to delay finalising its decision but "acknowledges that Aurizon Network continues to pursue its judicial review application".

Aurizon appealed an earlier decision that cut its maximum revenue take from its monopoly Queensland rail network to A$3.9bn ($2.8bn), which is A$1bn less than Aurizon said it should be allowed to earn. It warned that a more disruptive and cost-saving maintenance scheme will be required to make up for the earnings shortfall.

The Argus spot prices assessment for premium hard coking coal has remained above $170/t fob Australia this year and above $185/t since early August, as tight supplies of preferred premium low-volatile cargoes have offset periods of weak buying interest.

Maintenance this year on the Goonyella and Blackwater rail lines in Queensland operated by Aurizon have created bottlenecks in the supply lines between mines and export terminals. Although the impact of Aurizon's maintenance schedule has not been as severe as the rail operator's estimated 20mn t hit to Australian coking coal exports, the rotation of ballast cleaning between the railways countered the price effects of record production at many Queensland coking coal mines.

Some mines located further from the ports have had their railcar allocations from Aurizon and Pacific National reduced as the train operators navigate the railway maintenance disruptions, leading to growing stocks at the mines and less availability on spot markets as contract volumes are prioritised.

Producers have also found it increasingly difficult to book vessels in advance when stockpile levels at the ports are difficult to predict. Some vessels at Abbot Point and Gladstone have racked up demurrage fees while waiting at anchor for deliveries delayed by the lack of available railcars. These bottlenecks could be exacerbated as ballast cleaning moves to back the Blackwater line from the Goonyella line in September.

The vessel queue at Dalrymple Bay Coal Terminal (DBCT) was at 36 today, indicating a waiting time to load at the coal terminal of about 17 days. The queue has remained above 30 vessels for months and further increased after maintenance on one of the shiploaders from early July was extended by a week into mid-August. The next shiploader maintenance at DBCT is scheduled for November.

"I'm surprised spot prices are not already moving a lot higher with all the port congestion we are seeing," said an Indian merchant coke producer. "The spot market looks very tight, especially for premium low-vol and second-tier coking coal."

The impact of DBCT port queues should not be as severe as last December, when waiting times extended beyond a month and premium hard coking coal spot prices climbed to $260/t fob Australia. But buyers in Japan and India that rely heavily on contract volumes from Australia are watching the situation closely.

"Prices might keep rising in September because autumn is coming and that is a good time for steel demand from China and India. Profit margins are also very good, so any squeeze on supply might push prices higher," a Japanese trader said.