Strong tailwinds for US coking coal

As US coking coal prices continue to surge upwards, tight supply fundamentals and high Chinese domestic coking coal prices point to further upside despite weakness in the steel and iron ore markets.

While Chinese mills have consistently indicated that US offers are coming above their expectations, the recent willingness to accept these offers, which have risen by as much as $10-20/t each time from the last done deal, indicates that these buyers have little alternative.

Border restrictions on truck deliveries from Mongolia may ease if Covid-19 infection rates fall further from the highs of June this year, but Chinese buyers are already bracing themselves for tighter restrictions again in the winter should there be a resurgence in infections. Rail wagon shortages and weather-related rail disruptions in Russia have limited spot availability of coking coal and PCI since June as well, and despite some recovery in rail capacity, supplier confidence has remained strong, with Russian offers racing ahead of index levels.

The Chinese premium domestic coking coal price is assessed at the equivalent of $446.53/t today, up by $114.99/t from just a month earlier, with top graded Anze low-sulphur coking coal pegged at about 3200 yuan/t ($492/t).

Despite the current highs, market participants have their eye on transaction levels for premium low-vol coals reaching $400/t cfr China this year. Freight is around $61-62/t for Panamax and $55/t for Cape. The Argus-assessed daily China cfr for premium low-vol hard coking coal has been hitting new record highs daily, since the assessment was launched 10 years ago, reaching $367/t today. The premium low-vol China cfr price has increased to $59/tin the last month, the steepest price hike since October 2016, when weather disruptions to port loadings in Australia caused a spike.

The Argus daily US low-vol coking coal price rose by $58.25/t on the month to reach $283.25/t fob Hampton Roads yesterday, reflecting the mid-point between premium low-vol and low-vol grades. This is a level not seen since August 2011, when US coal achieved peaks in profitability, with miners such as Peabody, Arch, Alpha and smaller operations like Walter Energy investing heavily in growing capacity. The declining competitiveness of US low vols against typically higher-grade Australian low vols in the Chinese market contributed to the decline of the US coal industry until late last year, when China moved to restrict the import of Australian coals. The scramble for alternative coals as Chinese mills cranked up output amid the post-pandemic recovery in the first half of this year and an already shrunken US coal industry made for a perfect storm in driving prices to their present highs.

While there was some initial hope among Chinese mills and caution among US miners earlier this year that China may back track on its informal ban, the continued poor state of political relations between China and Australia has led market participants to expect the ban to stay for some time. Just last month, UK-Australian resources firm and major Australian low-vol coal producer BHP indicated that it expects China's restrictions on Australian coal imports to remain in place for years, setting an unambitious metallurgical coal production target of 70mn-78mn t on a 100pc basis for 2021-22.

Despite softer steel prices and this week's sharp fall in iron ore prices, rising met coke prices in China offer more leeway for coking coal prices to rise. Chinese hot-rolled coil stood at $914/t fob Tianjin today, down by $13/t on the month, while the Argus ICX 62pc iron ore fines index recovered today to $140.55/dry metric tonne (dmt) after plummeting to $131.80/ cfr Qingdao yesterday in a record single-day decline of $20.65/dmt. Met coke prices in Hebei and Shandong are due for their fifth consecutive hike, after the last four hikes totalling Yn480/t in under a fortnight, on the back of rising domestic coking coal prices and low stocks among Tangshan mills.

Strong demand has also meant that previously less-established brands of US coals are gaining a strong foothold in the market. "Earlier this year the Chinese mills were sceptical about US low-vol brands beyond Buchanan, Oak Grove and Blue Creek 7," said one trader. "But since then a few Affinity cargoes have been placed in China and buyers view it as another tested option." The strength in low-vol coals has also spilled over to the high-vol A segment, where Chinese buyers have widened their sights beyond Arch's Leer high-vol A for example, with trades for less-familiar brands such as Metinvest's Wellmore high-vol A recently being cited regularly.

Rail capacity in the Atlantic is also a source of concern for supplies. Increased demand is putting stress on the regularly beleaguered US east coast rail system. The rail operators do not have sufficient crew to handle the higher traffic and are not able to hire fast enough, suggested one US miner. A spike in Covid-19 infections within their system again has not helped either, he said. Canada's Teck is projecting a 500,000t reduction in 2021 coking coal output to 25mn-26mn t, to reflect the disruption to rail transportation caused by wildfires. The miner has indicated that it plans to prioritise sales to China, retaining its target of 7.5mn t this year. "That would mean someone else in the market is likely not getting the coal they had hoped for this year," said one Atlantic miner.

By Siew Hua Seah

US fob, China cfr coking coal prices $/t