TRADE REVIEW: Asia met coal could see supply-side tightness ease in Q4 as buyers resell cargoes

This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore , metallurgical coal, copper , alumina, cobalt , lithium , nickel and steel and scrap . We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

The seaborne metallurgical coal market has entered the fourth quarter facing continued supply tightness, although some respite could be in sight as sources point to greater availability in the prime hard segment, buoyed by the reselling of cargoes by buyers.

The benchmark Platts premium low-volatile hard coking coal prices on FOB Australia basis jumped $100/mt, or 43%, on the quarter to $333/mt towards end-Q3, while the PLV CFR China prices rose $56/mt, or 25%, over the same period to $280/mt Sept. 29, according to S&P Global Commodity Insights data.

The Q3 rally was driven in part by the supply crunch following mine accidents, stringent safety inspections and industrial actions, along with sluggish output amid planned maintenance works.

Spot availability grew thinner in September, with a major Australian miner reporting three spot deals in September for October-/November-loading premium hard coking coal totaling 110,000 mt, sharply lower from over 400,000 mt in August with September-loading laycan by the same miner, sources said.

Analysts at S&P Global have raised their forecast for Q4 FOB prices to $290/mt, from $249/mt, last month, as they expect some supply-side pressure in the early days of the current quarter before prices begin to peak.

Some respite in sight

Despite the supply-side pressure in Q3 and early-October, optimism remained over some improvement in prime coal output from major Australian miners.

Australia's BHP said it expects increased production in the second half of the financial year.

Pockets of demand were heard from ex-China markets, especially India, for November-/December-loading prime supplies, while a few end-users in other regions were understood to be reviewing inventory with the intention to resell Australian PHCC cargoes amid a challenging operating environment, sources said.

"Buyers tend to be wary of the upcoming rainy season in Queensland in the first quarter of the year and potential supply constraints, so will try to ensure they are well stocked before the end of the year," S&P Global analysts said in a note Sept. 26.

China outlook cloudy

Stringent safety checks in China are expected to remain in place in Q4 following a spate of mining accidents in the previous quarter, leading to reduced domestic supplies. But, at the same time, demand from Chinese mills remain lackluster amid negative mill margins.

Meanwhile, steelmaking hubs in China's northern region are expected to implement pollution curbs in Q4, which will further reduce demand for prime hard coking coal, a major Chinese steelmaker said.

However, official data showed crude steel output remained at higher levels, casting continued doubts over whether local authorities would press ahead with supply curbs in Q4 amid fiscal woes, China-based traders said.

China produced 795 million mt of crude steel in the January-September period, up 1.7% on the year, the government data showed. In September, however, the output dropped 5.6% on the year to 82 million mt.

'A tale of two coals'

Supplies of lower-ranked coals, meanwhile, remain ample, in contrast to the output crunch in the Australian prime coal segment, leading to a correction in the relative value of such coals, an international steelmaker source observed.

The value of low-vol HCC in relation to PLV fell to a three-year low Sept. 28, with low-vol HCC and PLV at $259.75/mt and $333/mt, respectively, on FOB Australia basis, according to Platts assessments by S&P Global.

Trader sources expect the relative value of low-vol HCC to strengthen in Q4 from a value-in-use perspective, should the PHCC segment remain elevated. Cheaper options of HCC with inferior specifications are plentiful, but the supply of good-quality low-vol HCC is not as abundant, a Singapore-based trader said.

End-users, however, expressed tepid interest amid deteriorating margins, as well as the ongoing and expected output cuts.

"The relativity [of low-vol HCC] appears a bit low currently at below 85% [of PLV] but unaffordable to end-users in an absolute term following a sharp increase in PLV prices," an Asia-based coke producer said.

Uncertainties over PCI supply

In a similar vein, the price of Australian low-vol PCI relative to that of premium low-vol hard coking coal slumped to a near five-year low of 53.4% Sept. 18, with the spot price of low-vol PCI assessed at $168/mt and that of PLV at $314.75/mt FOB Australia Sept. 18, S&P Global data showed.

The drop in the price relativity was led by increased Russian PCI supplies to markets like India and China following the European Union's ban.

Uncertainties, however, remain over the Russian PCI supply in Q4 as the winter approaches, along with duties by Moscow on major exports, including coal, effective Oct. 1, which could potentially aid the Australian PCI market in Q4, a Northeast Asia-based steelmaker said.