February 2021 Argus White Paper: Seaborne coking coal market 2020 year in review China’s ban on Australian coal imports redrew trade flows in 2020 and sparked a revival in fob spot trade, lifting it to record volumes across a broader swathe of customers and regions. Cfr trade volumes slumped with limited alternatives to Australian supplies, which remain at risk to wet weather in early 2021. China’s import ban redraws trade flows Seaborne metallurgical coal trade flows saw seismic shifts in late 2020 as China’s ban on Australian coal forced its buyers to turn to US and Canadian coal, while other regions bought up discounted Australian supplies at a record pace. Import restrictions into China have existed in varying forms since 2017, such as annual quota limits and stricter quality inspections, but they had always been temporary. That changed in October 2020 when major importers were verbally told to stop importing Australian coal. China has reset its annual quota each year, but this time no end date has been given for the ban on Australian coal. Estimates for its relaxation have been pushed forward from early 2021 to after the lunar new year holiday and to now not until 2022. Australian coal vessels have not been allowed to discharge or clear customs since early October, with only a few exceptions. No Australian coking coal has been sold to China since then. This has put Australian producers in a bind. China imported a record 35.4mn t of Australian coking coal in 2020, around a fifth of Australia’s met coal exports. The country either needed to cut output or find customers for 3mn-4mn t/month of supplies, and the market needed to find a home for an estimated 4mn-5mn t of coking coal sitting in limbo off China’s ports. Key takeaways Trade flows China’s informal ban on Australian coal shifted trade flows, lifted fob trade to record volumes Asia-Pacific spot metallurgical coal trade volumes fell by 24pc to 23.4mn t in 2020 Record quarterly spot trade volume of Canadian and US coal at 525,000t Price trends Record cfr China price premium to fob Australia of $106.85/t US and Canada brands flip to a premium to Australian coal Customer base shift flips premium low-volatile prices to discount to premium mid-volatile This scramble for buyers lifted spot trade volumes for fob Australia tier 1 coal to a record 2.6mn t traded in December and 4.42mn t in the fourth quarter. Metals illuminating the markets Copyright © 2021 Argus Media group - www.argusmedia.com - All rights reserved. Trademark notice: ARGUS, the ARGUS logo, ARGUS MEDIA, ARGUS DIRECT, ARGUS OPEN MARKETS, AOM, FMB, DEWITT, JIM JORDAN & ASSOCIATES, JJ&A, FUNDALYTICS, METAL-PAGES, METALPRICES.COM, Argus publication titles and Argus index names are trademarks of Argus Media Limited. Argus White Paper: Seaborne coking coal market 2020 year in review China’s domestic coking coal prices were already at a premium of $70/t equivalent over tier 1 imports before the ban, so Chinese buyers could afford significantly higher import prices compared with other seaborne buyers when they searched out alternatives. Record fob spot transactions Fob Australia Tier 1 spot trade volumes mn t 5.0 North America to the rescue 4.5 4.0 With the doors to Australia shut, Chinese buyers were forced to turn to North American suppliers, a known, but less commonly used alternative. 3.5 3.0 2.5 2H 2020 Tier 1 cfr China spot volume share 2.0 1.5 14% 1.0 0.5 Elkview 0.0 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 All-time high of fob spot transactions in the fourth quarter of 2020 at 4.42mn t versus 3.56mn t a year earlier. The number of fob tier 1 transactions also rose to a record high of 64 in the quarter. The average fourth-quarter spot price fell to $109.40/t fob in 2020 from $139.89/t in the fourth quarter of 2019. Cfr China premium rises to record The Argus cfr China premium low-volatile (PLV) hard coking coal index soared by 37pc to $218.15/t by the end of 2020 after the ban started, while the corresponding fob Australia index slumped by 23pc to $103.50/t over the same period. The opposite trends lifted the cfr China index to a record premium of more than $100/t above the fob Australia index. The last time such a wide price gap appeared was when Cyclone Debbie sent fob prices soaring in early 2017. Fob Australia Tier 1 spot trade volumes $/t 350 fob Australia Raven Blue Creek #7 Other (Australia) 18% Canadian coal producer Teck Resources even created a bespoke high coal strength after reaction (CSR), mid-volatile blend specifically targeted to Chinese customers, named Raven. Other well-known brands such as Standard and Elkview have been popular, mainly among coastal steel mills in south China, many of whom are longstanding customers of Teck coal. While US coal is traditionally seen by many in China to be less appropriate given their higher volatile matter content, Oak Grove and Warrior’s Blue Creek No.7 all had strong buying interest in China, mainly because of the high CSR. Other brands like Coronado’s Buchanan fetched higher prices as well for their potential to be used in blends to lower ash content. This became increasingly critical as many Chinese steel producers were forced to use domestic Chinese coking coal that had higher ash levels. The addition of Buchanan helped to lower the overall ash content of blends. Chinese buyers have few other options, and North American mining companies are not geared to rapidly expand output after previous market downturns. The US and Canada could increase coking coal exports by 5mn t and 3.5mn t in 2021, Argus Consulting Services forecasts in the latest monthly Seaborne Coal Outlook. cfr China 300 250 200 Mongolian supplies are expected to rebound from their 30pc fall to 23.8mn t imports to China in 2020 but not enough to fill the gap. Mongolia also cannot match Australia’s quality, while its long-truck hauls are not ideal for coastal steel mills. 150 100 50 2017 18% 50% 2018 argusmedia.com Copyright © 2021 Argus Media group 2019 2020 2021 2 Argus White Paper: Seaborne coking coal market 2020 year in review Mozambique’s Moatize supplies have also faltered, prompting Japanese trading house Mitsui to exit as an investor and Brazilian mining firm Vale to consider selling the mine. cfr trade for early 2020 arrivals. This increase brought forward activity from early 2020, which with stalled trade in late 2020 widened the year-on-year drop. Price relationships switch places Fob basis tier 1 deals rose to 132 in 2020 from 113 in 2019. Semi-soft and PCI liquidity increased to a combined 55 deals, with 3.93mn t reported in 2020, up from 36 deals and 2.75mn t in 2019. PLV coking coal like Saraji and Peak Downs historically have priced at a premium to the tier 1 fob Australia index because of Chinese buyers’ preference for coal with high CSRs and lowvolatile matter. But fob price dynamics with the ban began to reflect the preferences of Indian buyers entering the market. They prefer premium mid-volatile (PMV) brands for higher fluidity over low-volatile content and high CSR. This pushed traded prices for Saraji and Peak Downs coal below the index, while Peak Downs North and Goonyella flipped from discounts to premiums over the index. The magnitude of the shift is noteworthy for PMV coal, which at one point traded as much as $7/t below the index, while the discount for PLV never exceeded $2/t. Brand differentials to Tier 1 fob Australia index mn t 9 8 Tier 1 Tier 2 Semi-soft PCI 7 6 5 4 3 2 $/t 4 Asia-Pacific met coal spot trade volume Goonyella Peak Downs Saraji Peak Downs North 1 0 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 17 17 17 17 18 18 18 18 19 19 19 19 20 20 20 20 0 Looking ahead -2 Despite various iterations of restrictions over the years, China’s controls on imported coal are expected to be a mainstay of markets. -4 -6 -8 -10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan The ban also flipped US and Canadian coal brands to premiums over Australian brands for the first time in Asia-Pacific trade. The grades have not competing directly with each other and instead are trading in separate buckets — cfr China and fob Australia markets. US and Canadian coal was selling into China at more than $100/t higher than Australian coal for export at the end of the fourth quarter. Overall trade volumes fall by 24pc Asia-Pacific spot met coal trade volumes fell by 24pc to 23.4mn t across all categories in 2020. Argus observed 306 spot deals in Asia-Pacific trade for tier 1, tier 2 and semi-soft coking coal and pulverised coal injection (PCI) coal in 2020, down from 375 deals in 2019. The main driver of the fall was a 47pc drop in cfr China tier 1 trades to 92 deals from 172 deals in 2019. China’s anticipated reset of its annual quota for 2020 drove a late 2019 surge in argusmedia.com Copyright © 2021 Argus Media group Australia has surprisingly managed to emerge relatively unscathed from China’s import controls targeted at them. Despite suffering an initial setback, most producers have successfully reallocated volumes into other buying regions. Mills in Europe that declared force majeure on US coking coal contracts in the depths of the 2020 Covid-19 lockdowns freed up tonnage for US producers to sell to China but left the mills needing replacement coal. China’s large-scale buying of US and Canadian coal has pushed buyers from other regions to fulfil their volume shortages from Australian coal producers instead. Part of the answer has been tapping the stranded cargoes at Chinese ports. The $100/t price differential between cfr and fob markets was too large for buyers and sellers to ignore. China signalled there would be no change in policy in the short term, forcing the coal to find a new home or else keep racking up demurrage fees. Trading firms asked mills in Europe and Japan whether they would swap some of their US coal supplies for Australian coal, with some trading firms offering to split the profits. 3 Argus White Paper: Seaborne coking coal market 2020 year in review This swap-and-split-the-profits trade narrowed the cfr-fob price difference by a third in January. Fob prices rose by $48.40/t, or 45.7pc, to $152.05/t over 4-27 January, while cfr prices rose by $16.65/t, or 8pc, to $218.15/t over the same period. Chinese import trade falls to record low end of 2020 Cfr China Tier 1 spot trade volumes mn t La Nina weather risks to Queensland coal supplies remain a factor in early 2021. This weather supply-shock risk, coupled with China’s demand-shock brakes, have generated abrupt shifts in the market, which in turn have supported spot trade volumes and increased indexation in contracts by participants trying to navigate the uncertainty. 6.0 China’s sheer size and buying power, Australia’s unpredictable weather and the very nature of coking coal being difficult to substitute will continue to make waves for years to come. 2.0 5.0 4.0 3.0 1.0 0.0 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Cfr China tier 1 spot trade volumes fell to a record low of 525,000t in fourth-quarter 2020 from 4.8mn t in fourth-quarter 2019, a clear impact of the import restrictions. For more information please contact: Rou Urn Lee Senior Reporter – Coking Coal Direct: (65) 6496 9931 Email: rouurn.lee@argusmedia.com argusmedia.com Copyright © 2021 Argus Media group All of the fourth-quarter cfr China tier 1 spot trade was US or Canadian-origin premium low-volatile coking coal such as Teck Raven, Teck Elkview and Blue Creek No.7. Prices peaked at $211/t cfr China in the quarter. The average fourth-quarter cfr China spot price rose to $155.84/t from $152.77/t a year earlier. 4
