Demurrage squeezes coking coal arb to China

Rising port delays and freight costs are squeezing the arbitrage for coking coal imports to China, deterring deals for spot volumes that may not be able to unload at port until 2021 if import restrictions are not eased.

Jingtang, the main port for coking coal imports into north China, has slowed customs clearances for Australia-origin coal cargoes since late June, increasing the queue to 29 vessels holding 2.6mn t of coking coal, with delays for some now stretched to nearly two months, traders said. Caofeidian has a queue of 16 vessels with 1.3mn t of coking coal. Panamax demurrage charges were at around $10,000/d when most of the queued vessels were booked, equivalent to around 14¢/t for every day delayed.

Importers are accustomed to delays and the freight fees, but this year's restrictions have tightened up earlier than in years past, catching traders by surprise and pushing mills to ask the government for more quota.

"Seaborne coal is more competitive even if you add demurrage costs, with a waiting time up to two months. The demurrage cost for a Panamax vessel is $17,000/d and Capesize is $21,000-22,000/d. The problem with the long waiting time is that buyers cannot use those stocks, so their cash gets locked up in a way and adds to their financial burden," a trader from China said.

Top-tier domestic Liulin No. 4 low-sulphur coking coal is priced at 1,340 yuan/t ($190/t) on a free-on-rail basis in north China, about $70/t higher than the premium low-volatile hard coking coal index at $117.70/t cfr China. Dalian commodity coking coal futures for September-December settlement are at around Yn1,200/t.

One trading firm's vessel that has been queuing for a month and a half at Jingtang has accumulated $400,000 in demurrage fees, and its berthed vessels that have not been allowed to unload have incurred charges of $500,000, a trader at the firm said. Those costs add $7/t to the total landed cost for a 70,000t Panamax, which at seaborne spot prices is still well below domestic prices.

These vessels were booked when a Panamax from Australia to China cost around $7/t, but now that freight is nearing $12/t, so the risks are higher for spot buyers with demurrage at $18,000/d, the trader said.

Even if a vessel were to fail to get customs clearance until 2021, an $18,000/d rate would add another $34/t in demurrage over the remaining 133 days left in the year, still only half the $70/t discount for seaborne coals to Chinese domestic coals.

"It is considered good as long as these berthed vessels can be released for custom declaration by the end of the year," an official at a major Chinese steel producer said.

Some trading firms have re-routed their vessels from Jingtang to Rizhao and Bayuquan ports as these ports are allowing vessels to unload before custom declarations are processed, and this will enable them to save a lot on demurrage costs. But such modus operandi will be limited to users with import quota to obtain approval from the port authority, and operations will become more restricted at Bayuquan port from August onwards, traders said.

Buying interest remains depressed for imports to China even with the arbitrage opportunities, largely because buyers have exhausted their import quotas, a Chinese trading firm said. "Should the import restrictions remain as it is, prices are expected to come under further pressure given the weak demand."

By Dylan Wong, Deepali Sharma and Chris Newman