China giveth and China taketh away,” was how one experienced shipper put it. “Get used to it. It’s the new normal if you want to be in the coking coal business.”
Apart from a lamentable distortion of the Book of Job, this industry elder is as accurate as he is single-minded. With painfully slow world economic growth as a telling back-drop, China almost single-handedly bolstered the coal market late last year - then just as surely dumped it this year.
A sudden budding of Chinese met coal spot demand late in 2012 blossomed bountifully early in 2013, pushing hard coking coal CIF pricing to a peak close to $190/t.
Chinese spot pricing for ULV PCI simultaneously peaked above $160/t CIF, netting back to around $150/t FOB on the same basis, auguring for a strong turnaround in April-June contract pricing.
Thermal coal spot pricing briefly also caught the updraft. The Chinese volatility – widely interpreted as the start of a broad market upswing – in retrospect looks more associated with local factors, including short term issues with Mongolian met supply and safety-associated closures at key internal met mines.
Fast-forward to April and Chinese demand has quickly dissipated, leaving shippers struggling hard to defend benchmarks, and even harder to stay away from tumbling spot markets.
The Chinese fade out has cast BHPB’s April-June quarter (Q2) hard coking contract settlements in a new light. Initially appearing to have left money on the table, the deals – up around 4% at a $172/t FOB headline for premium Peak Downs brand – now look sweetly timed ahead of the price tumble.
The met coal settlements represented the first quarterly contract price increases since the July-September quarter of 2012 and also followed four consecutive rises in BHPB’s monthly-priced met deliveries since November, last year – all seeming sound reasons for optimism.
That was then. This month BHPB has been forced to offer discounts on the hard coking benchmarks of almost $10/t for May priced deliveries while settlements for Q2 contract benchmark semi-soft at $121/t, although up $4/t on Q1, failed dismally to match the earlier pace.
The downturn was even more pronounced in thermal coal where spot Newcastle spec material – with some help from weather and industrial action in Australia and Colombia – had bounced early 2013 to a peak of $97-98/t FOB, basis 6,000kc NAR.
Spot prices have since been savagely discounted, as low as $85-86/t FOB on the same basis, culminating in a $20/t year-on-year price cut for large tonnage Australia-JPU April start contracts, with the new $95/t FOB benchmark, basis 6,322kc GAR, probably flattering the shippers.
But even worse may be in store. Looming resumption of incomplete Q2 negotiations with India’s EJC, due late this month, will surely see state-controlled steel maker SAIL move to further capitalise on the spot market downturn.
SAIL last month played a shrewd game in fully settling only with its major met supplier, BHPB and New Zealand’s Solid Energy, while agreeing pricing only for April on a provisional basis with its other Australian suppliers, Anglo and Peabody.
The two Australians now face SAIL talks covering Q2 supplies totaling around 0.8mt, in the harsh light of BHPB’s emerging May delivery FOB pricing at circa $162/t for Peak Downs and $159/t for Goonyella brands, i.e. discounts of around $10/t off the quarterly benchmark.
BHPB is said to have initially circulated its May offers at $164/t FOB for Peak Downs and $162/t FOB for Goonyella, meeting strong resistance. Buyers, particularly in India and Europe, are increasingly contending that quarterly benchmarks ‘lack market reality.’
They typically cite China where spot hard coking coal is understood to be selling as low as $155 CIF, although volume remains small and individual deals are difficult to identify.
Australian sellers claim they are simply not supplying top tier coal (Peak Downs/Goonyella quality) at Chinese asking prices and that their liftings remain strong from major contract customers. They indicate the Chinese market is currently being almost exclusively supplied with lower rank brands.
Similarly in PCI, little if any ULV product is being traded, but some cargoes of mid vol PCI qualities, said to be from Australian, Canadian and Russian suppliers, are understood to be pricing in the $115/t-120/t range.
The Chinese trends decisively put the skids under semi-soft which was initially favoured by continuing steel mill moves to increase usage of lower rank coals. This saw initial Q2 contract price offers from major shippers, Rio Tinto and Xstrata at circa $126.50/t FOB.
This would have represented a price rise of just over 8% on the Q1 benchmark of $117/t FOB, falling neatly between the 4% contract rise for hard coking coal and 14% for ULV PCI.
The price offer would also have maintained a relationship around 73% for semi-soft against the hard coking benchmark, but steel mills had other ideas, even though it’s understood at least one Australian semi-soft shipper is said to have earlier agreed Q2 pricing at around $123/t FOB.
Price discounting in both met and thermal markets also comes as Australian shipments continue to increase, inviting buyer cynicism on claims that low falling prices are forcing ‘production discipline.’
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