Tight US Gulf coke supply could persist through 3Q

Petroleum coke prices rose steadily over the past month, as recovering demand in the cement market met scarce supply.

The benchmark fob US Gulf 6.5pc sulphur price hit $36/t as of the last Argus assessment on 17 June. This was a 9pc increase from the price on 27 May.

Market participants are watching whether this balance could reverse in the coming months as refining capacity returns but demand growth in some key regions, like India, could stall over the longer term.

But there are indications that US Gulf coast supply could remain tight well into the third quarter, in part because of inventory drawdowns earlier this year. Much of this inventory has piled up in stocks in China and India, which could put a lid on further price increases. Cement demand in some regions, such as the Mediterranean and Latin America, has not fallen as much as expected over the last few months, even as some countries in those regions have faced serious outbreaks.

Before the recent price increase, the US Gulf 6.5pc sulphur specification had hovered around the $33-$34/t level since early April, following an initial sharp correction that began in mid-March as the effects of the Covid-19 pandemic were felt worldwide.

This stable pricing was somewhat unusual in the energy market. Other commodities, particularly crude, jet fuel and gasoline, hit record lows as the pandemic sent demand into a tailspin.

Although it is an oil product, coke's demand is largely based on the construction and power markets rather than the transportation sector. While some countries halted construction and shut down cement plants, these industries were not hit as strongly as some had expected and are bouncing back quickly. This is in stark contrast to demand for jet fuel, which could take years to return to pre-pandemic levels.

The sharp decline in transportation fuels demand led refiners to idle units or even in some cases entire refineries. This has a side effect of making less coke. And although gasoline demand is about halfway back to pre-pandemic levels, US independent refiners are still limiting crude runs and middle distillate output to prevent adding to record diesel stocks and producing too much unwanted jet.

Additionally, US Gulf coast coke inventories had already likely been largely depleted before the most intense Covid-19 lockdown period of March to May.

High-sulphur coke prices surged between January and mid-March, reaching a peak of $41.50/t during the week of 11 March, an almost 30pc rise from the price on 15 January. These higher prices had some sellers looking to move as much as possible. One refiner said in early March that it expected to ship out half of its planned annual production in the first quarter because of increased demand.

At that time, Indian buyers were predicting a strong year for cement production growth, and lower domestic supply availability, increasing seaborne import demand.

And high-sulphur supply was already tight in the first two months of this year because of refinery maintenance and outages and economics favouring lighter crudes.

Demand from China also grew after the government's 18 February announcement that buyers could apply for exemptions to tariffs on US coke. Refineries and coal mines there had severely reduced production at the height of that country's Covid crisis. As a result, by March, Chinese buyers were booking historically high volumes of US coke for April loading. The boost in China shipments contributed to an almost 5pc increase in overall US green coke exports in April, which was almost certainly based on inventory drawdown as US refining rates were down to their lowest overall level since Hurricane Harvey struck the US Gulf coast in the summer of 2017.

Demand from China is unlikely to continue at such high levels, as inventories have been piling up at the ports there and many firms are increasingly worried that tariff exemptions could be removed. The recent price increases have been largely driven by India, as cement firms look to prepare for a potential pick up in cement demand after the monsoon rains. But coke stocks there are also high, estimated to be about double their normal levels, which could soon dampen this fresh interest.

A shrinking discount to coal could also stem the upward momentum of US Gulf coke prices. The cfr India 6.5pc sulphur coke price was only at a 12pc discount to Richards Bay coal on a delivered, heat adjusted basis as of the last assessment on 17 June, and the Argus fob Richards Bay price assessment slipped by another $1.32/t on 19 June to $52.09/t.

By Lauren Masterson