Met coal price inflection point looms in Q2 as coronavirus impact intensifies

Supply tightness made the seaborne metallurgical coal market extremely resilient in the first quarter - until prices came under pressure in March as the coronavirus pandemic forced multiple countries into lockdown.

Now there is growing consensus that the met coal market will hit a key turning point in Q2 as steelmakers outside of China slash production and spill unsold met coal cargoes into China's seaborne trade arena - where demand, while rising as the country pares back its own virus containment measures, is unlikely to absorb such an unprecedented surplus.

In January and February, seasonal low supply of met coal was exacerbated by supply tightness from China and Australia and contributed to lower spot trade volumes observed in Q1.

Premium low-volatile hard coking coal benchmark prices averaged $155.05/mt FOB Australia in Q1, up 11% from Q4 2019, but down almost 25% year on year, S&P Global Platts data showed.

Spot transaction volumes observed by Platts fell 33% on year to 7.8 million mt in Q1, and was 47% lower than the five-year average of 14.8 million mt over the first quarters of 2015-2019.

Market sentiment going into Q2 is bearish amid concerns of oversupply. China is the clearing market for seaborne met coal and has been ramping up domestic production rapidly in April after mining and logistics came to a near halt during the country's coronavirus lockdowns in February.

Restrictions to contain the virus led to a significant slowdown in China's downstream steel consumption in Q1 and its steel inventories surged above 90 million mt, three times higher than in March 2019, according to Platts estimates. The need to destock steel inventories could put pressure on steel prices and potentially force mills to trim output in Q2.

This will hinder China's ability to absorb excess raw material supply left behind by global steel mills cutting production as pandemic lockdowns are increasingly imposed around the globe. With demand falling across Europe, India, Brazil and Japan, more coal cargoes are likely to be redirected to China, which will weigh heavily on met coal spot prices.

Potentially compounding the oversupplied market are expectations of strong production in Australia, where drier-than-average weather has been forecast for the eastern state of Queensland in Q2 by the Bureau of Meteorology. This follows severe wet weather in Q1, with some sites reporting their highest ever February rainfall. Wet weather tightens supply chains as it reduces mining days, reduces railway capacity and increases vessel queues at loading ports. Exports from Dalrymple Bay, Hay Point and Gladstone were all lower in February than January, which helped support seaborne prices in much of Q1.

The question now is: Will there be a price inflection point in April, with prices coming under pressure as the COVID-19 pandemic weighs on the seaborne market? As the world's biggest consumer and importer of the steelmaking raw material, China will have the biggest say in this question.

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CHINA DEMAND

Despite port restrictions and some logistics challenges caused by the virus, China's met coal imports over January-February jumped 47.5% year on year to 15.2 million mt, customs data showed. A key reason for the surge was the import arbitrage averaging $21/mt in the quarter, providing end-users with a strong incentive to procure cheaper seaborne material over domestic supply.

But the import market could weaken in Q2 as the arbitrage narrows in tandem with the reduced appetite for steel raw materials as China trims steel production. Platts spot trade data shows 44 spot trades on a CFR China basis were reported in February-March for cargoes that will likely arrive over April-May. This compares to 52 trades reported over December-January, indicating lower month-on-month arrivals in the first two months of Q2.

SPOT LIQUIDITY

The 33% year-on-year fall in seaborne spot trades to 7.8 million mt was the result of Platts observing a total of 97 spot transactions for seaborne met coal by late March, comprising premium, second-tier, semi-hard and semi-soft coking coal and pulverized coal injection, or PCI. The total does not include spot transactions for US export

Lower trade volumes reported for Q1 reflected tight supply and poor rest-of-world demand, notwithstanding healthy Chinese demand over the period. Premium hard coking coal, or PHCC, accounted for 56.3% of the spot market, of which 58% was Premium Mid Vol HCC. The total reported PHCC trade volume for Q1 was down 36% year on year at 4.7 million mt, well below the five-year average of 7.3 million mt. Based on Platts' observed trades, BHP's coals accounted for 80% of the spot market, and Glencore's 14%.

There is growing consensus in the market that a turning point at which prices come under pressure from an oversupplied market and soft demand is looming, and could even emerge before the end of April.

Whether or not spot market liquidity will increase remains to be seen - China holds the key to that question - as does how the trajectory of the COVID-19 pandemic impacts the global steel market and the price implications for steel raw materials.