Nobody yet is quite sure whether Australia and China’s spat over coking coal imports will eventually turn out to be a case of bad politics making good economics or bad economic sense making for good politics.
While politics between China and Australia is part of the reason for the former to have completely banned the import of coal from the latter, it has led to churn in the Asian the rest of the global coal markets.
With China not lifting the ban despite it being a new year (as some had anticipated), the volatility in the markets is likely to continue.
This morning in metals news, Vallourec on Monday announced it would furlough one-third of its North American workforce, Portland’s Evraz is laying off 250 at its spiral pipe plant, and Cleveland-Cliffs is idling the AK Coal Resources Inc.
Just as we were about to go to press with an article on the surprising resilience of seaborne iron ore and coking coal prices in Asia, the market in Asia closed yesterday with heavy falls – they beat us to it.
Supply disruptions and what looks like an overly optimistic assessment of likely stimulus measures have supported iron ore and coking coal, despite the collapse of just about all other commodity prices.
According to Reuters, spot 62% grade iron ore for delivery to China recently rose 1.6% to $93 per metric ton and the most-traded May 2019 iron ore contract on the Dalian Commodity Exchange soared as much as 4.1% to 710.5 yuan ($106) per ton — the highest for the Asian benchmark since 2013.
Such robust price performance was not a one-day spike, but was reflected across the week as the contract gained nearly 10% during the first week of April on a combination of strong steel mill buying and concerns over constrained supply from both Australia and Brazil.
Nor was the bullish sentiment confined to iron ore, as Reuters reported coking coal on Monday rose 1% to 1,258.5 yuan ($187.29) a ton, and coke rose 1.4% to 2,048.5 yuan ($304.86).
Demand is at its seasonal peak as the weather warms in China and construction work begins in earnest, pushing up steel futures by more than 3% in early April. According to Reuters, the most-active construction steel rebar contract on the Shanghai Futures Exchange recently rose as much as 3.6% to 3,710 yuan ($552) a ton, its highest since Aug. 22, while hot-rolled coil jumped as much as 3.4% to 3,955 yuan a ton ($588).
Such performance suggests the steel market is roaring in China, fueled by another infrastructure spending spree, but the reality is something different.
This morning in metals news, China ramped up its aluminum output in December, British police are looking into allegations of pension fraud against steelworkers and India considers a plan to have its steel ministry oversee iron ore and coal operations.
Coking coal has more than doubled in a matter of days as a cyclone caused disruptions to Australia’s coal exports. The impact was significant and several miners had to declare force majeure on their coal deliveries.
It is estimated that shipments accounting for 50% of the global coking coal supply will be delayed and that Australia will need at least two months to regularize its coking coal exports after the natural disaster.
Australian coking coal’s free-on-board price in US dollars per metric ton. Source:mining.com.
Coking coal prices rose sharply in the second half of last year when China reduced allowable work days at the country’s coal mines, which reduced output and tightened the global coking coal market. These events added fuel to rising steel prices in China. But a slump in coking coal prices since December added pressure to steel prices, especially in China since the country strongly depends on the commodity to make steel.
Can Higher Coking Coal Prices Give a New Boost to Chinese Steel Prices?
The Chinese cold-rolled coil price. Source: MetalMiner IndX.
A recent CNBC article states that Australia is the world’s biggest coking coal exporter and therefore, China’s largest supplier. The recent disruptions are forcing China to look for alternative supplies such as Russia, Mongolia or Indonesia. In addition, China won’t import more coking from North Korea as a punishment to recent North Korean missile tests.
Higher coking coal prices translate into higher input costs, particularly in China. Chinese steel prices set the floor for international steel prices, a topic that we discussed recently. Steel buyers should monitor the recent surge in coking coal prices closely since steelmakers will potentially pass on the increase to consumers, giving a boost to weakening steel prices in China.
It seems like a bizarre question when iron ore has been on a bull run this year and coking coal producer Glencore has just agreed first-quarter contract prices with Nippon Steel that are the highest since 2011.
But Morgan Stanley, in its 2017 Outlook, takes a bullish stance on base metals but forecasts bulk commodities such as iron ore and coking coal will do no more than tread water next year. Trying to call a peak in any market is, at best, a stab in the dark, but coking coal spot prices appeared to be easing just as contract prices set a new near-term record. Read more
The increasing price of global coking coal, a key ingredient in steelmaking, may squeeze Indian steelmakers’ profitability and deepen financial risks, according to a Fitch Ratings report. Prices had crossed the $190-a-metric-ton mark recently. The steel companies risk will also increase if the high prices persist while domestic steel demand growth remains low. Which essentially means that the increase in raw material costs for Indian steel producers may shrink their margins, if the rise is not passed on to consumers.
Coking Coal Imports
The bulk of India’s coking coal is imported to compensate for the lack of good quality coal from the country’s own mines. In addition to steel plants, the raw material used by coal-based power plants, cement plants, captive power plants, sponge iron plants, and almost all depend on importing non-coking coal.
Coke is imported mainly by pig-iron manufacturers and iron and steel sector consumers using mini-blast furnaces. India imported around 200 million mt of coal last financial year to top domestic production of 640 mmt.
Steel mills in India are turning to new suppliers and reopened mines to provide coking coal with prices up. Source: AdobeStock/zjk.
So India, despite efforts by the government to reduce its dependence on foreign coking coal, has to import it from countries like Indonesia, South Africa, Russia and Australia. Coking coal prices in Australia have surged in the last few months, so what’s good news for that nation is bad news for India’s steel makers. Read more
Yes, they did. Significantly, domestically, but the index collects and weights 13 global steel and raw material price points. So, while prices in the U.S. fell, international prices held well and coking coal prices saw a spectacular increase.
The price of Chinese coking coal, a vital ingredient in the steelmaking process, more than doubled in September. Behind the surge are disruptions in Australia, a leading supplier to the export market, and production curbs in China caused by government restrictions.
Global steel production continues to increase. In August, production in China rose 3% year-on-year. The country still has a lot work to do if it wants to meet its target of reducing capacity. Meanwhile, U.S. steel production fell in August.
Taxing Chinese Supply Creates Opportunity Elsewhere
Despite a recovery in prices during the first half, U.S. producers haven’t increased output to create an artificial domestic shortage. However, there is no global shortage and falling domestic output is only pushing steel buyers to source their needs from overseas.
The clearest example is cold-rolled coil (CRC). Prior to the recent trade cases, China accounted for more than half of U.S. CRC imports. Imports from China were effectively shut down thanks to a super-high dumping/countervailing duty margin of 265%. However, it seems that imports now are coming from other sources. In August, cold-rolled coil imports rose almost 11% from last year, recording the highest levels in 13 months.
Tariffs Can’t Stop International Prices From Falling
In a bid to protect their turf from the new wave of steel imports, U.S. steel companies are filing a case against transshipments of Chinese steel products from Vietnam.
U.S. steelmakers will likely find it difficult to prove those allegations and, even if they do, those same imports could come from other countries. Trade cases can provide short-term breathers in the current import environment, but — in the medium- to long-term — U.S. steel companies will have to become more competitive to win the market back from imports. Although U.S. prices have fallen recently, the spread between U.S. and international prices is still lucrative for domestic buyers to look overseas for their material.
The key now is not only to watch domestic prices, but also international prices. Eventually, the current decline in domestic prices will find support if the gap between domestic and international prices narrows enough. On the other hand, if international prices start to slide, too, it might be difficult for U.S. steel prices to find a floor.
Actual Steel Prices
The Chinese slab price fell 5% to 378 CNY per mt. US shredded scrap fell 8% to finish the month at $219 a mt. Chinese HRC fell 3% to 414 CNY per mt from 435 CNY a month ago. The U.S. HRC futures contract declined 8% to $490 per mt. China coking coal rose 315%.