Analysis: PCI buyers seek new supply options: Update

Adds latest spot trade and index level in paragraphs 12-13

Inconsistent spot supply of traditional Australian pulverised coal injection (PCI) coals is pushing Chinese steel producers to seek blended alternatives.

High metallurgical coke prices in China have kept domestic demand steady for PCI, which is added into the blast furnace to reduce metallurgical coke consumption. But most of the PCI supply out of Australia is locked into long-term contracts, with supplies going to Japan, South Korea, Taiwan and India. Fewer supplies of this grade have been reserved for spot sale compared with other metallurgical coals. This has left Chinese steel producers with fewer spot options and more exposed to fluctuations in quality.

"We expect to hear of PCI offers from a major Australian PCI supplier for end-March loading at the earliest," a south China steel producer said.

Chinese customs have been rejecting cargoes with high trace elements under the country's environmental protection policies. This is a problem for Australian PCI coals, supply of which has become increasingly inconsistent since last year, Chinese participants said. Some traders have started blending different varieties of PCI coal in Australia to sell to China, to fill the supply gap and tailor coals to fit buyers' quality requirements.

"We have two main varieties of blended PCI — one is high-vol and the other is low-vol," a Chinese coal marketing manager said. "We also have the flexibility to blend cargoes according to buyers' individual specifications and adjust prices accordingly."

The trading firm's main PCI brand has high fluorine levels to begin with, so blending is required for the company to be able to sell into China, she said.

Such a move appeals to Chinese steel producers, which have lamented that Australian PCI coals are often too expensive but needed because China's domestic PCI quality is too low.

The blended varieties are therefore a good compromise between price and quality, the same south China steel producer said.

Buyers from other regions such as India and Japan have also started to show interest for blended PCI, but they have been comparatively slower to act, the same Chinese coal marketing manager said.

Chinese customs placed limits on the entry of imported coal in November last year to prevent coal imports from exceeding a pre-set level. This forced many vessels to drift around Chinese ports as they were barred from berthing and unloading, causing traders and producers to fork out millions in demurrage costs, Chinese traders said.

After port restrictions were lifted at the start of this year, at least one cargo a week of blended PCI has been sold to Chinese buyers, albeit at lower prices of below $130/t cfr. Buyers are currently on the lookout for blended PCI cargoes that are loading in February. The seller has stressed that it will eventually lock in more volumes of blended PCI into long-term contracts once the market has tested their usability and is satisfied enough to commit to long term tonnages.

A Panamax-sized cargo of blended PCI with 17pc volatile matter for March loading traded today at $128/t fob Australia. But this particular variety of PCI trades infrequently, and was last seen in the spot market in September.

The Argus assessment price for low-vol PCI on a fob basis has fallen by 5.5pc since October to $127.45/t fob because of a string of quality issues. This included high fluorine and ash content in popular PCI brands such as BHP's Southwalker Creek PCI and Peabody's Coppabella PCI, which meant that spot PCI often struggled to trade at high levels. Rejected cargoes from China were typically resold into India at a discount of as much as $10/t.