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May 18, 2023 - Global coking coal markets are in a compelling situation in 2023 as the world's largest steel producer China reopens its economy, leading to expectations of higher consumption and a pickup in steel demand, while drier conditions are seen providing relief in Australia after flooding disrupted coal production earlier in the year.
As China returns to buying Australian coal after a two-year hiatus, Australia already has shipped more coal to China in the first four months of 2023 at 1.4 million mt than in full year 2022.
At the same time, the US is gearing up for competition with Russia for a larger piece of India's market, while Europe's ban on Russian pulverized coal injection and other coals and weaker internal steel demand are also keeping prices under pressure.
All these signals point to elevated coal trading activity globally in 2023.
How does all this coal get traded to respective destinations and end-users? One part of the picture is commodity trading platforms.
As the world shifts to a digital ecosystem, online commodity trading platforms have started playing a significant role as marketplaces.
Some coal traders have told S&P Global Commodity Insights they find online coal trading platforms efficient in helping improve market transparency while serving as an effective route for credible price discovery.
If price discovery happens via efficient channels, this helps market players gauge the true demand-supply situation in real time, allowing them to prepare for risk management, capital investment and business planning activities.
Mechanisms operated by coal trading platforms differ, but the most widely used are auction-based and bid-and-offer systems.
"Pricing points generated by trading activity feed into the market's most widely-used indices, improving their integrity and reliability," trading platform globalCOAL said on its website.
This helps pull in dealers and traders to transact on such systems and can also help land them good deals, according to traders.
Marketplaces for Metals
There are several commodity trading platforms in the metals space, including globalORE, Mjunction and Trayport.
Mjunction is a B2B e-commerce firm, built as a joint venture between India's leading steel companies Tata Steel and SAIL, that focuses on auctioning commodities such as coal and agricultural production in India. Mjunction recently conducted its first ever e-auction of large cardamom.
Trayport is focused on energy markets, including European gas and global coal, allowing users to access key markets across multiple asset classes.
Another popular trading platform, globalORE, focuses on iron ore trade.
The globalORE platform allows each bid or offer to be displayed with the counterparty depth and breadth of the buyer or seller, according to the company.
Counterparty depth refers to the number of 'matched' counterparties able to execute the order and counterparty breadth?denotes the number of different market segments, such as steel mills, producers and traders, represented among the 'matched' counterparties able to execute the order, globalORE said on its website.
Spotlight on globalCOAL
One of the major, globally focused online coal trading platforms is globalCOAL, which is backed by some of the world's leading coal market participants. While some view the platform as the go-to venue for coal markets, others critique what they perceive as limited participant visibility.
The platform's trading community consists of around 160 international consumers, producers and traders of coal, according to the company's website.
That includes a huge list of diversified miners, dedicated coal producers, steelmakers, electricity companies, coal traders and other players across the world that are closely connected with coal markets, its data showed.
A few of those listed to trade include Anglo American, ArcelorMittal, Adani Global, Baosteel, BHP, Idemitsu and ITOCHU.
The trading platform also lists more than 2,600 licensed users that use the platform to trade physical cargoes. Licensed users are not licensed to trade on the screen, but are licensed to trade on SCoTA terms, the company said.
The platform allows trading of thermal coal and two types of metallurgical coal – premium mid-vol and premium low-vol hard coking coal.
Trades, bids and offers are posted anonymously or executed through its platform in a fully transparent and auditable way, with all orders genuine and capable of being traded, globalCOAL told S&P Global Commodity Insights.
"All trades and orders are for a standard specification, so that prices are fully comparable, and no subjective normalization is required," the company said.
globalCOAL offers trade through the Standard Coal Trading Agreement, known as SCoTA, in coal markets. The company said SCoTA is designed to standardize around one specification. It enables users to buy and sell physical coal cargoes quickly, efficiently and with limited basis risk.
For any user to participate on the platform, globalCOAL's parent company Global Commodities Holdings (GCH) requires the user to have a reciprocal credit arrangement with a minimum number of active counterparties, the company said, although it did not define the term 'active' in a written interview with S&P Global.
globalCOAL also did not disclose what the minimum number is in the interview. However, it is heard to be around five, according to some globalCOAL users.
Users of globalCOAL also told S&P Global that they can only see whether a bid or offer is open to them but do not see how many counterparties in total it is open to. As such, bids and offers on the platform are sometimes considered to be restrictive and therefore seen as not representative of market levels, according to market sources.
"Many companies are registered as users on globalCOAL but only a handful are active," a trader said.
"If you choose to only have a credit arrangement with five very inactive counterparties, you can bid higher and higher without having anyone being able to hit your bid on screen," another trader said.
globalCOAL, which also publishes price indices based on platform activity, said its GCH screen-based indices, for example the NEWC index, will require a bid/offer to be on screen for a minimum of 15 minutes in order to be counted as viable to its index methodology.
NEWC index is a reference price for thermal coal for spot delivery on an FOB basis at Newcastle port in New South Wales, Australia.
Some traders told S&P Global that they found the credible price discovery and market price transparency offered by the platform a helpful reference in finalizing actual bilateral transactions in the wider market.
GCH said it will launch an index screen that allows traders to link pricing to the requested index of choice in the met coal markets, replicating a system already in place for thermal coal markets over the last 20 years.
Commodity Trading
Trading in met coal facilitates the steady consumption by mills that produce steel to build infrastructure. About 0.77 mt of coal is needed to produce 1 mt of steel, according to BHP.
Global markets are slowly catching up with the shipment pace seen pre-pandemic, when global exports reached 329.4 million mt in 2019, according to S&P Global data.
In 2022, global met coal shipments were still 6.3% behind 2019 at 308.7 million mt. Of this, around 10% was estimated to be spot trade.
The steady rise of met coal trade volumes suggest a continued reliance on online coal trading platforms, with platforms playing a critical role in the global market transparency of on-screen bids, offers and trades expected to remain in the spotlight.
Global spare oil production capacity has shrunk and the refinery sector is not keeping pace with growing fuel demand, putting the world at risk of future supply crunches, according to OPEC Secretary General Haitham al-Ghais.
The industry is in need of significant investment, but finds itself in an increasingly challenging financial environment, exacerbated by "unhelpful criticism and misguided narratives" about fossil fuels, said Ghais, who has notably sparred with the International Energy Agency over its criticism of OPEC production cuts and messaging on the future energy mix.
The secretary general, a Kuwaiti OPEC veteran who will be a keynote speaker at the Middle East Petroleum & Gas Conference in Dubai on May 22-23, said in written response to questions that anti-fossil fuel advocacy has stoked market volatility and jeopardized global energy security, and he called for dialogue that "reflects the realities that are at stake for our energy future."
He also addressed the demand outlook for the oil market, the growing influence of speculators, and OPEC's continued alliance with Russia, as the group prepares to meet in Vienna on June 3-4 to review production quotas.
Below is a full transcript of Ghais' responses to questions from S&P Global Commodity Insights.
S&P GLOBAL: Many forecasters are expecting global oil balances to be much tighter in the second half of the year. How does OPEC see market fundamentals shaping up over the next several months, and how will that influence the OPEC+ decision on June 4?
GHAIS: The OPEC secretariat monitors the oil market dynamics on a daily basis. It is our bread and butter, and helps to inform our ministers and the Declaration of Cooperation.
For example, back in October 2022 when OPEC and non-OPEC countries participating in the DoC took a proactive and pre-emptive decision to adjust overall production downward by 2 million b/d, it was based purely on technical market fundamentals. Given developments in the market since, many have commented that the decision was the right one.
In terms of the current outlook, on the oil demand side we see global demand growth in 2023 at around 2.3 million b/d. We also know that there are a number of economic uncertainties the world is carefully navigating through, including high inflation, higher interest rates, particularly in the eurozone and the US, the impending US debt ceiling, high debt levels in many countries and regions, and how China's reopening plays out through the rest of the year.
As always, we will continue analyzing and closely monitoring all technical market fundamentals in great detail. Obviously, all of these technical factors will be carefully considered in the discussions and whatever decision is taken by ministers at the June meeting. However, we cannot pre-empt what will be discussed, and what any potential outcome will be.
S&P GLOBAL: Related to the first question -- many members in April announced additional voluntary production cuts from May. Do you see a need for further production cuts, or do you envision market conditions allowing for those additional cuts to be scaled back in the weeks/months ahead?
GHAIS: Again, we should not get ahead of ourselves and we have to wait until ministers meet in early June. In addition, it is important to reiterate that the April 2023 announcements on voluntary production adjustments were made by individual countries; they were outside of the DoC framework. I should add too that given market developments in the period since, these voluntary adjustments have proven to be the right ones.
The DoC has repeatedly shown itself to be attentive, proactive and flexible over many years, undertaking extraordinary efforts to stabilize the oil market in these extraordinary times. This is in the interests of producers, consumers, the oil industry and the wider global economy, and I have no doubt this will continue.
S&P GLOBAL: You have been vocal in responding to the International Energy Agency for its messaging on energy markets and climate, which you say is undermining needed investment in oil. In your view, how can there be a more constructive dialogue around those issues?
GHAIS: We have an open door policy at OPEC. We are always ready to dialogue. We are always ready to cooperate. This is our mantra, and it is one I intend to fulfill.
However, we have to respond to external commentaries related to OPEC, particularly unhelpful criticism and misguided narratives.
We also need to recognize the importance of the dialogue with all energy stakeholders. We need to ensure what we say is fact driven, and reflects the realities that are at stake for our energy future.
From our perspective, and knowing that all data-driven outlooks envisage the need for more oil to fuel global economic growth and prosperity in the decades to come, it is troubling to hear calls to stop investing in oil. Our energy future is an "and" question, not an "or" question. The world desperately needs investments in all energies, and in all technologies to help reduce emissions.
Since I became OPEC secretary general, I have been clear in highlighting the very real consequences of underinvestment in the energy sector, especially oil. Underinvestment causes market volatility and endangers energy security. Underinvestment imperils economic growth and jeopardizes sustainable development.
It is vital that we get our energy future right: securing reliable and affordable energy for all while reducing emissions. This can only be achieved through international cooperation based on multilateralism and constructive dialogue.
S&P GLOBAL: When asked previously on production quotas, particularly in the summer of 2022 as oil prices surged, various OPEC+ officials responded that there was no shortage of crude available, that it was refinery closures and a lack of downstream investment creating tightness in the refined fuels markets. Is global refining capacity going to be a problem going forward for crude oil producers?
GHAIS: It is clear in recent years that there has been a lack of investment in refining, specifically in the OECD. For example, the latest grassroots refinery addition with significant capacity in the US was Marathon's facility in Louisiana that came online in 1977. In fact, during 2020 and 2021, around 3 million b/d of refining capacity was also closed, mostly in OECD countries. This has resulted in diesel and gasoline stocks being well below the five-year average for quite some time now.
Our latest World Oil Outlook sees an investment requirement of $1.6 trillion in the downstream. It is vital that these are urgently made to avoid further downstream tightness as oil demand increases further in the years to come.
I would like to highlight here that OPEC member countries continue to invest heavily in the oil industry, especially in the downstream sector. Recent examples include ADNOC's Crude Flexibility Project at the Al-Ruwais refinery in the UAE, the Dangote Refinery in Nigeria and the Clean Fuels project and Al-Zour refinery in my home country of Kuwait. [Kuwait Petroleum Corp.] is also constructing the Duqm refinery in Oman with OQ. Saudi Aramco has also made major investments into refinery operations in China and I recently visited the 340,000 b/d Dos Bocas refinery that is currently being built in DoC country Mexico. Despite all of this, oil demand will grow faster than the net refining capacity additions and that may lead to further petroleum product shortages.
Looking ahead, we should also recognize that the future of refining capacity will be geared more towards building refineries that are more complex. To add value, it is no longer just about extracting the margin through the complexity of refining crude, but by integrating petrochemicals. There is a growing trend to integrate the petrochemicals business with the refinery to realize maximum value.
S&P GLOBAL: Sanctions on Russia have upended global oil flows, and the geopolitics surrounding the oil market are as fraught as ever. How do you see OPEC's relationship with Russia evolving, and how secure is the Declaration of Cooperation between OPEC and its partners?
GHAIS: Russia has been part of the DoC since the end of 2016. Clearly, the DoC efforts have contributed significantly to the stability of the global oil market, especially during the market downturns in 2016 and 2020.
The past 15 months or so has evidently witnessed major shifts in global crude and product flows patterns. As you know, it is a global marketplace for oil, and this enables both producers and consumers to adapt to accommodate new shifts in trade patterns. DoC countries realize the stability they bring to oil markets, and not only to producers, but also to consumers, and accordingly for the global economy. Therefore, the DoC remains a cornerstone of market stability, and some often underappreciate its value.
It is worth noting that if the global oil market lost Russian oil and product volumes, we would observe heightened and unprecedented volatility. This is why every country participating in DoC is focused on ensuring this cooperative framework remains in place in the years ahead.
Indeed, the DoC has a proven record of accomplishment and we should ask ourselves the question: Where would the oil industry and the global economy have been heading without the unwavering support of the DoC?
S&P GLOBAL: OPEC has warned for a while about the need for sufficient upstream investment to meet future demand. Are your members finding it difficult to find the financing necessary to maintain and expand their crude oil production? How can this investment gap be solved? Are you seeing any uptick in investment globally in the industry?
GHAIS: I have touched upon the issue of investment in a number of the earlier questions. The chronic underinvestment we have been witnessing is truly a global challenge, manifesting itself in production constraints, shrinking spare capacity and reduced refinery output. It is a challenge that we cannot keep procrastinating on and leave to tomorrow.
We continue to face efforts to create a policy rulebook that stigmatizes hydrocarbons and that seeks to divert much-needed investment away from the industry, including movements by financial institutions to limit and stringently control how money is invested into oil under environmental, social and governance. This situation has stoked uncertainty and volatility to the detriment of producers and consumers -- and ultimately global energy security.
It is also disheartening, and particularly impactful on developing countries with oil and gas resources, many of whom rely on revenues from these commodities to build their economies and social infrastructure.
Upstream capital expenditure has picked up as the markets have rebalanced and more stability has returned, yet the results of recent underinvestment may become more apparent in the medium term. Steady and stable investment is also essential if the industry is to innovate and further lower its carbon footprint. With respect to OPEC, our member countries are leading by example with significant investments in clean hydrocarbon technologies, carbon capture, as well as in renewables.
S&P GLOBAL: Lastly, OPEC officials have from time to time complained about the influence of speculators on the market. We have seen OPEC+ go from monthly meetings to now holding more irregularly scheduled meetings. Has the group evolved in its thinking on how hands-on to be in stewarding the market, and how do you strike a balance between communicating too much or too little to the market?
GHAIS: On the financial side of the oil market, we have been observing an accelerated trend in speculative trading, with investors and other players trading futures and options at faster rates, sometimes severely impacting market liquidity and hindering price discovery mechanisms. There has also been a visible and more prominent role of Commodity Trading Advisors and algorithm trading.
To put the role of financial markets in some perspective, the volume of ICE Brent and NYMEX contracts traded in 2022 was 50 times the volume of the actual oil produced in the physical market. The role of financial markets has been evident this year, with significant price volatility, despite the fact that supply and demand fundamentals have shifted very little. The market was being driven by speculation.
OPEC and OPEC+ remain focused on market fundamentals, and complement this with regular and transparent dialogue with consumers and all stakeholders.
The Joint Ministerial Monitoring Committee meeting every two months remains in place, and as we have shown over the years, we are flexible and agile. The JMMC has held 48 meetings since 2017, so we have honed our capacity to judge when is it is necessary and appropriate to hold meetings.
Energy transition topics dominate this week's Commodity Tracker as S&P Global Commodity Insights editors examine hydrogen prices, wind turbine sizes and voluntary carbon market credits. Also in focus are Germany's LNG imports capacity and seaborne coking coal prices.
1. North America edges ahead in global hydrogen race
What's happening? A global market survey of low carbon hydrogen projects shows North America is now leading Europe, the Middle East and China in committed investments, with a "let's get this done" attitude contrasting with Europe's bureaucratic quagmire. Final investment decisions in the US amount to $10 billion versus $7 billion in Europe and $5 billion in China and the Middle East. China is on a hot run, with growth in project announcements up 200% in just eight months. North American hydrogen prices as assessed by Platts, part of S&P Global Commodity Insights, are among the cheapest in the world due to low power and gas feedstock costs.
What's next? The bulk of some 1,040 projects globally, however, remain in early development as investors await any evidence of fresh, non-conventional demand. With Germany's H2Global auction platform in the early days of bidder selection, the prospect of matched, subsidized supply and demand is nearing, with the potential for first green ammonia shipments in 2025. Feedback from developers and offtakers is that the platform is simple, clear and well designed. Along with all new infrastructure, however, the global hydrogen industry is maturing during a time of strong headwinds which could slow deployment, including strained supply chains, labor shortages, increasing inflation and interest rates and permitting delays.
2. Offshore wind supply chain pushes back against constant pursuit for bigger turbines
What's happening? The offshore wind supply chain is pushing back against the constant pursuit for bigger turbines. In the quest for economies of scale, machines have grown to 15 MW in size – but executives and analysts say this unrelenting innovation is putting pressure on the supply chain and needs to be reined in. Instead of bringing out new iterations of turbine every two years, the major manufacturers and their suppliers are calling for a more sustainable pace of innovation.
What's next? Even before 15-MW machines make it into the water, turbine-makers from Europe and the US are already said to be touting 18 MW to 20 MW turbines for projects being installed later this decade. Industry observers say future capacity upgrades will require big investments in the supply chain's manufacturing capacity, given components and installation vessels get exponentially more expensive as turbines get bigger.
3. Germany expands LNG import capacity
What's happening? Once the biggest buyer of Russian pipeline gas, Germany has moved quickly to build out a significant volume of floating LNG import capacity as part of efforts to compensate for lost Russian deliveries. It already has three operational floating storage regasification units across its northern coast, with more to come by the end of 2023 and several permanent sites also under development. According to data from S&P Global, sendout from the three operational terminals passed the 2 Bcm mark on May 6. The average sendout rate so far in May is 20 million cu m/d — or around 7.3 Bcm on an annualized basis. Total German gas demand in 2022 was around 80 Bcm.
What's next? The three operational sites have a current combined import capacity of almost 14 Bcm/year, but more capacity is set to be added by the end of 2023. If all developments proceed to plan, Germany LNG import capacity would be at least 40 Bcm/year from summer 2024 onwards. However, the exact configuration of FSRU sites in northeastern Germany is not yet clear, with locations near the tourist island of Rugen under consideration and plans for more FSRUs in and around Lubmin.
4. Voluntary carbon market credit issuances in April rise more than 30% month-on-month VCM credit issuances
What's happening? Credit issuances in the voluntary carbon market exceeded 23 million in April, up more than 30% month on month, with nature-based avoidance projects in Peru accounting for more than 60% of the total. Two projects on Verra Registry were accountable for most of the issuances, with the Cordillera Azul National Park REDD project issuing ~11.4 million credits alone. The surge in Peru REDD project supply comes amid a March 30 Associated Press report disputing the environmental integrity of credits from the Cordillera Azul National Park REDD project, and as Verra released draft consolidated methodologies for REDD projects last month. Credit issuance increases in April have not been matched by an increase in VCM retirements, which fell 9% on the month; resulting in limited price growth for avoidance based VCM credits in April.
What's next? The higher-than-expected supply in April pushed the total 2023 VCM credit balance up to 34 million mt in 2023, 17% higher than the comparable balance increase observed between January-April 2022. Analysts at S&P Global do not expect this to exert significant bearish price pressure on the market, as buyers become selective over credits purchased in the market (with just 5% of the 11.4 million credits issued from the disputed Cordillera Azul National Park REDD project retired last month). Further bullish pressure is anticipated ahead of clarity over Core Carbon Principles due for release in the coming months.
5. Coking coal CFR China import prices weaken below FOB Australia
What's happening? Coking coal prices in the seaborne markets have declined for a third month. In China, import prices for premium low-volatile quality weakened below FOB prices since May 5. Lower domestic coking coal and met coke prices in China, and weaker demand on lower iron and steel production since April have slashed requirements. Meanwhile, as FOB spot prices have fallen 38% from a high in mid-February, Australian exports are seeing support from pockets of restocking demand in markets such as India and Japan. China has yet to boost imports of Australian coking coal to previous levels after a few trades since lifting restrictions led to 357,972 mt in imported over February and March. Price trends currently do not support bookings to China, with a gap of around $35/mt with FOB trade.
What's next? Chinese demand and pricing for met coal may continue to see import pricing moving in and out of range for delivered FOB prices from Australia and North America. China continues to be more reliant on Russian imports with availability and lower pricing due to sanctions hitting demand elsewhere and as Mongolian imports surge, following easing of COVID-19 transport restrictions. Higher contract volumes of Australian and US coals into India and other markets may limit the urgency to place spot tons in the second half of the year after stronger global availability in May and June cargoes. Forward spot export availability may be more dependent on realized shipments through the year under contracts and committed sales volumes, with underlying steel production and demand in India, Europe and South America.
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