In Commodity News 29/02/2016
Tighter supply of pulverized coal injection coal, combined with heavy cash cost pressure, have limited spot availability and elevated prices to their highest in nearly 10 months.
Low Vol PCI ticked up on February 22 to be assessed at $74.50/mt CFR China or $69.90/mt FOB Australia, after accounting for Panamax-size freight rate to Asia’s clearing market China. This was its highest since May 14, 2015, Platts data showed.
The price level was also higher than the benchmark for low-vol PCI settled in Japan late last year at $69/mt FOB Australia for the first quarter of 2016.
Cuts in PCI output at loss-making mines, as well as greater diversion of PCI from steelmaking to the thermal coal market and high mining cash costs, have all helped underpin prices in the PCI market, according to industry sources.
“The PCI market is balanced [in terms of demand and supply] as opposed to HCC [hard coking coal]. That’s why you see such resilience of PCI prices,” a major Australian PCI producer said.
While prices of premium-grade HCC — used in the production of blast furnace coke — have been on a sustained downtrend since the start of 2015, PCI spot prices have rebounded by 13% to date after hitting a multi-year low of $61.65/mt FOB Australia on July 22 last year. In comparison, prime HCC prices have slipped by 6% over the same period, according to Platts assessments.
PCI prices signed under long-term contracts have also declined — but by a smaller extent — compared to that of HCC.
Term contracts for Q1 low-vol PCI were inked at 85% of the price of premium HCC. This was higher than the average of 82% in 2015, 83% in 2014 and 79% in 2013. The percentage was even higher for spot low-vol PCI prices — at 91% of the Platts premium low-vol FOB Australia index so far this quarter.
The Q1 low-vol PCI settlement also represents a 3% decline from the previous quarter’s benchmark, compared with a quarter-on-quarter drop of 9% for premium HCC.
Several Asian steelmakers believe that Q2 term low-vol PCI prices have the strongest likelihood of a price increase among all met coal products due to short supply, according to a second Australian mining source.
The PCI-HCC term contract relativity will remain robust this year, two other producers concurred.
PCI is injected into the blast furnace during the pig iron making process to replace more expensive coke, and can also be used in place of thermal coal at boilers due to its high calorific value.
Australian supply cuts
Receding demand from China, which accounted for close to 80% of spot PCI liquidity during the year, had led to a precipitous price drop in the first six months of 2015.
Suppliers were unable to cope with the subsequent price rout, resulting in the reduction of output and greater sales of PCI into the energy market, a third Australian mining source said.
A few Australian producers told Platts that in some periods in 2015, they had found it more attractive to sell both low-vol and mid-tier PCI into the high-CV thermal coal market — further constricting spot supply in the PCI market.
A convergence between met and thermal coal prices was pronounced between May 5 and September 16, 2015, where spot and term met coal prices fell to levels at which PCI producers might reduce PCI and increase thermal sales.
Several Australian miners were also forced to cut back PCI production in the second half of 2015, with the sharpest fall seen in the low-vol PCI category.
Cockatoo Coal halted output from its near 1 million mt/year low-vol PCI Baralaba mine while the company considers restructuring or a possible sale. And output from Anglo American’s Foxleigh mine plunged 35% quarter on quarter in Q4 2015 to 376,000 mt, with the annual 2015 figure down 8% compared with a year ago, at 1.9 million mt. The company has put its 70% stake in the mine up for sale since February 2015, but no buyers have been found.
As a result, total average PCI output from operations at eight major Australian mining companies in 2015 fell by 8.5% from a year ago, according to company reports and industry sources. These firms are: BHP-Mitsui, Peabody Energy, Yancoal Australia, Anglo American, Jellinbah Group, Wesfarmers Resources, Vale Australia and Cockatoo Coal.
The exception was BHP Billiton Mitsui Coal, which raised output at its South Walker Creek and Poitrel mines.
The size of the PCI seaborne market has also fallen correspondingly, by 4.8% year on year to 41 million mt in 2015, according to estimates by Goldman Sachs in a January report.
“The output cuts at higher-cost low-vol PCI mines mean that nearly all the supply is [tied up] in long-term [contracts], and there’s not much left for spot sales,” a fourth Australian supplier said.
Platts observed 14.2 million mt and 197 PCI spot transactions in 2015, down from 17.6 million mt and 255 deals in the previous year.
Cash cost curve provides support
Furthermore, with spot and even term prices having slipped to parity or below the industry’s PCI production cost curve, producers have been motivated to cut production rather than to continue selling at below cost, according to a Brisbane-based trader.
Average PCI cash costs for 12 active low-vol and mid-tier PCI producing mines in Australia were at $68-$69/mt FOB Australia in 2015, according to estimates from two industry experts.
This compares with an average of $87.50/mt FOB Australia for low-vol PCI quarterly term prices in 2015, and the full-year average low-vol PCI spot price of $73.48/mt FOB Australia as assessed by Platts.
“If the quarterly price [for Q2 low-vol PCI] drops lower than [the Q1 low-vol PCI price of] $69/mt FOB Australia, most PCI producers would have to start shutting down,” a European steelmaker said.
Consequently, constricted PCI supply has enabled producers to maintain selling prices closer to cash costs, sources said.
The recent uptick in PCI prices and continued downtrend for high-CV thermal coal prices also imply PCI producers have no incentive to sell their output as coal-fired boiler feedstock, starting from Q4 2015.
Slower price declines for Chinese PCIs
Another important factor behind the strength in seaborne PCI prices was the slower price declines in the Chinese domestic coal market seen in the last six months.
This was due to tighter Chinese PCI supply arising from a combination of mining accidents in Shanxi province, weather-related supply disruptions as well as closures of loss-making private mines, sources said.
Adding to the supply squeeze, China’s PCI imports last year have fallen sharply, because of quality restrictions on trace elements, the imposition of an import tariff duty, and cheaper domestic alternatives.
In fact, Shanxi low-vol PCI delivered to north China steel mills is several dollars cheaper than Australian material.
Platts assessed PCC Met Shanxi PCI with 9.3% volatile matter (air-dried), 10.8% ash (air-dried), 8% total moisture at Yuan 565/mt DDP Tangshan on February 24, or $60.96/mt CFR Jingtang equivalent after accounting for moisture, credit, transport and port charges.
But sources told Platts that coastal mills in east and south China located far from Shanxi, the main PCI-producing hub, will still require regular purchases of imported PCI.
“On a delivered basis, Australian PCI is still cheaper than Shanxi PCI, although quality-wise both are very similar,” a major south China steelmaker said. “I don’t expect my PCI consumption to fall this year.”
Steady long-term demand from India, China
In the long term, market participants believe that PCI prices have already reached a multi-year nadir and would be unlikely to plunge much further.
The reduction of the 6% import duty to 2% at the end of last year and its subsequent removal at the end of 2016, as well as greater clarity on coal quality checks could see some Chinese demand resurface, industry sources said.
The sustainability of this demand would hinge on how much supply cuts are made at struggling Chinese coal mining enterprises like Lu-an Group and Yangquan Coal Industry Group. Both are possibly operating at negative cash margins and carrying out workforce reductions across several of their mines, sources said.
The two companies could not be reached for comment.
Furthermore, rising output at India’s steelmakers is expected to drive up global PCI import demand. PCI injection rates at both private and state-owned steel mills are expected to rise, as mills push injection rates higher in order to reduce coke rates and improve productivity, sources said.
Consultancy CRU predicted global demand for PCI to grow at a faster rate than for coking coal — at a compound annual growth rate of 1.6% between 2015 and 2019, compared with 0.3% for coking coal.
One major Indian steelmaker told Platts that a higher utilization rate planned for at his plant this year would lift its PCI consumption by close to 60% over 2015.
Other non-Australian miners are also keeping an optimistic view for long-term demand.
In particular, Krunch Ltd., an exclusive distribution and trading arm of Russian PCI mines Razrez Kiyzasskiy and Vostochniy, believes PCI demand will increase in the next five years, with growth opportunities in Asian markets, a company source said.
Combined coal production from the two mines is expected to surge by 77% to 2.3 million mt in 2016, from 1.3 million mt in 2015.
However, not all participants are convinced that PCI prices could stay firm amidst languishing seaborne coke prices and falling steel demand from China.
The current PCI-HCC spot relativity of over 90% is also unsustainable in the long term and would likely drop back to historical averages, an Australian producer of HCC and PCI said.
“There’s always a limit to the price steelmakers are willing to pay for an injection [coal] linked to the cost of coke,” an international trader said. “No matter how tight the supply is, if coke and coking coal prices go down, then PCI prices will have to follow.”
