Analysis: Selective buying widens coking coal spreads

The spread between Australian premium low-volatile and premium mid-volatile prices delivered on a cfr China basis has widened to as much as $20/t within the past week, as restrictive Chinese import policies further eroded demand for sub-premium grades.

The spread between premium low-volatile and mid-volatile coal is typically less than $10/t.

A Chinese trading firm last week sold an 85,000t October-loading cargo of Peak Downs North at $145/t cfr China, along with an 85,000t October-loading cargo of Saraji at $166/cfr China.

The two trades highlighted the difference in buyer profiles. The buyer of Peak Downs North is more flexible with its blends and can generally take brands considered to be premium mid-volatile by the Chinese, such as Goonyella, Illawarra and Moranbah North. There was a recent influx of these brands in the spot market as trading firms restocked in anticipation of Indian demand returning this month with the end of monsoon season.

But weaker steel prices and higher cost pressures instead forced many Indian steel mills to cut production, resulting in a surplus of premium mid-volatile cargoes that then had to be dumped into the Chinese market.

The buyer of the Saraji cargo at $166/t cfr China was a Chinese state-owned steel producer that can only use Peak Downs or Saraji because it has less flexibility in its blends. The steel producer is willing to pay higher prices for these imports because coal of similar quality cannot be found domestically.

While import quotas have been imposed on all ports in China since last year, the selective loosening of customs declaration checks, discharge checks and other administrative hurdles particularly at northeast China ports last week has contributed to a sudden increase in restocking demand from Chinese buyers in this area.

The Chinese government has mandated that coal imports in 2019 should not exceed volumes from last year and has imposed quotas on the volumes that can pass through each port. But because these restrictions in northeast China had always been stricter compared with southern ports, northeast China mills have found themselves with additional allowances while south China mills have already used up their quotas.

But it is unclear if Chinese buyers can continue absorbing the surplus volumes in the spot market. Import quotas for the year are expected to run out by the end of October. This means that any cargo arriving after October will unlikely to be allowed to clear customs or discharge, a Beijing-based trader said.

But with seaborne prices falling, some buyers may be willing to pay for demurrage to take advantage of lower prices. "Demurrage fees for a Panamax cargo are around $15,000 per day, so assuming demurrage of one month, buyers will only have to pay $5.30/t," the same trader added. "Even demurrage of two months will not be an issue."