Singapore (Platts)–16 May 2016 419 am EDT/819 GMT
The recent strength in steel prices, relative to power generation, has prompted coal producers to focus on producing semi-soft coal from thermal coal, which could cause an oversupply putting pressure on prices going forward, analysts said.
There has been an increase in spot trading of semi-soft coal, with traded volumes from the start of the year to May 11 at close to 2 million mt, compared to 2.8 million mt for the full year of 2015, according to Platts data. New coal brands as well as brands not seen since 2014 have started appearing in the market, including those of Australian and Indonesian origin.
HIGHER SEMI-SOFT PRODUCTION IN Q1 2016
This jump in spot trading corresponds to a production shift towards more semi-soft volumes from thermal coal as reported by many Australian producers.
Rio Tinto’s total semi-soft coal production from its mines was reported at 1.69 million mt for the first-quarter of 2016, a 13% year-on-year increase, according to its Q1 production report.
Also in the first-quarter, BHP Mitsubishi Alliance reported a 12% year-on-year increase in coal production to 1.76 million mt from its Blackwater mine, which produces both semi-hard and semi-soft coking coals.
Whitehaven reported a production ramp up at its Maules Creek mine to 1.97 million mt of saleable semi-soft coal in the first-quarter, up from 0.99 million mt.
Only Glencore’s first-quarter semi-soft coal production was stable at 1 million mt, among the four main Australian semi-soft coking coal producing companies whose reports were available.
The surge in semi-soft production was due to production sequencing at the various semi-soft mines, prioritizing semi-soft production over thermal coal production, which can be done by further washing of thermal coal that has coking properties, according to mining reports.
PRICE DIVERGENCE BETWEEN SEMI-SOFT AND THERMAL COAL
The difference in fundamentals between the steel and power generation industries caused the divergence in thermal and semi-soft prices, said sources.
Semi-soft coal prices had recovered since hitting lows of $66.25/mt CFR China in December 2015 — the lowest price since Platts started assessing semi-soft coking coal in October 2011. Semi-soft coking coal prices have since rebounded to as high as $75/mt CFR China, a 13% increase, as at end April.
Semi-soft coking coal prices recovered due to support from the steel industry, where it is used as a filler in the coking coal blend in the production of coke, which is one of the key raw materials for crude steel production.
Platts Chinese Rebar HRB400 18-25MM domestic steel index rose from December lows of Yuan 1,615/mt to as high as Yuan 3,160/mt in late April, with steel mills reporting profits as high as Yuan 800-1000/mt at that time.
Conversely, Platts FOB Newcastle 6,300 kcal/kg GAR thermal coal, which is of lower ash specifications and is closer to semi-soft coal, price was assessed at a ten-year low of $46.60/mt on April 28, data showed. Prices had started to slump rising from the beginning of this year to around mid-March.
The plunge in thermal coal prices was due to rising hydro-electricity generation in China which eroded demand for thermal coal burn in southern China, the country’s main thermal coal import zone.
Availability of alternative origin coals from Russia, Colombia and Mozambique added further pressure on Chinese imported coal prices, said market sources.
This comes after a brief increase in thermal coal prices in China earlier in the year when the winter was more severe than expected causing tightness in domestic supply as inland logistics were affected.
Washing thermal coal “makes sense” currently, as “coking coal prices have gone up aggressively,” a trading source said.
He expected miners to continue washing their Newcastle thermal coal for “as long as the arbitrage [the price gap between semi-soft coal and thermal coal] stays open.”
SWITCHING COST OF SEMI-SOFT FROM THERMAL
According to sources surveyed, the additional cost due to longer washing to convert thermal coal to semi-soft range from $2-$3/mt and volume yields from thermal coal range from 80%-90%.
The production costs and yields, however, could vary from one mine to another as different coals have different characteristics and some older operations could have as low an yield as 65%-75% even, sources said.
To calculate the price spread between semi-soft and thermal coal, Platts normalized thermal coal prices based on Platts 6,300 kcal/kg GAR assessment, which is roughly equivalent to 6,000 kcal/kg NAR coals, to a typical semi-soft CV specification of 6,700 kcal/kg NAR — assuming a 90% yield rate of semi-soft from thermal coal and $2/mt additional cost from longer washing.
The price gap between semi-soft coal and thermal coal was seen widening to a high of $6-$8/mt in early April, according to the calculations. The last time the spread was viable for a switch was in the last week of December 2015 to mid-January, before the cold spell hit China.
TREND SUSTAINABILITY
Semi-soft coal typically trade at prices around 75%-85% of Platts Premium low-vol CFR China marker, according to sources.
But the spot price has recently dropped to 72% of the marker on July 20 signaling an oversupply in the semi-soft coal market.
Producers who switched to producing more semi-soft coal from thermal coal were already facing difficulty offloading volumes, especially in China, while suppliers targeting other regions said that it was easier to sell there.
“We are trying to push out as much volume as we can, but I’m sure other producers are thinking the same way,” said an Australian mining source.
“There’s definitely a risk that the market could get saturated (with more spot supply).”
Demand from Asian countries other than China remained strong, with consistent inquiries from mills in Japan, South Korea and Vietnam, another miner source said, adding that his company was fully sold out of semi-soft coal until the next quarter of this year.
Chinese end-users are skeptical about sustainability of the switching, because China end-users don’t plan to increase their consumption of semi-soft coals.
“The extent [that steel mills] can increase their usage of semi-soft coals in the coal blend also depends on availability of other types of coals in the market and they cannot just simply switch because there is semi-soft supply available,” according to a Chinese sell-side source.
“One shipment of semi-soft cargo can last for three months for us,” a South China-based steel mill source said. “Steel mills and coke plants can change their procurement volumes in the short-term but ultimately are unlikely to be able to absorb so much semi-soft in their blend in the long-term,” another China-based steel mill source said.