January 12, 2023 - The seaborne metallurgical coal market is entering Q1 2023 on a strong note amid growing hopes for easing trade between China and Australia and possibility of wet weather conditions in Queensland.
The benchmark Platts premium low-volatile hard coking coal prices, basis FOB Australia, increased $24/mt, or 9%, quarter-on-quarter to $294.50/mt, while PLV CFR China was up $7/mt or 2%, to $315/mt at the end of Q4.
Meanwhile, wetter than average January to March for eastern Queensland forecast by Australia's Bureau of Meteorology could lead to a third consecutive year of supply disruption from Australia.
China a key swing factor in 2023
The global volume of seaborne met coal spot trades fell 52% year on year to 9.8 million mt in 2022. S&P Global Commodity Insights observed a total of 193 spot transactions for seaborne met coal in the year, comprising premium, second-tier, semi-hard and semisoft coking coal, and pulverized coal injection coal used for steelmaking. This was compared with the 20.6 million mt of spot transactions observed by S&P Global in 2021. Out of all deals reported for 2022, a majority 83% was observed to be premium hard coking coal (PHCC), followed by pulverized coal injection (PCI) coal at 15%. About 90% of the PHCC spot transactions seen were for cargos bound for ex-Chinese markets for 2022.
Some market participants argue that the spot market could be seeing the light at the end of the tunnel, with an improving geopolitical relationship between China and Australia, potentially leading to the return of China for spot Australian coal in 2023. Based on the S&P Global data, up to 80% of the spot market liquidity was observed concluded on CFR China basis across varying grades of met coal prior to the unofficial ban in Q4 2020.
China is close to lifting a more than two-year-old unofficial ban on Australian thermal and coking coal imports for its power and steel plants, as the country looks to expand its procurement origins and reduce trade flow disruptions following the Russia-Ukraine war, several market sources in China, Singapore and Indonesia told S&P Global earlier this month.
In addition, the Customs Tariff Commission of the China's State Council published on Dec. 28 the 2023 Tariff Adjustment Plan, reiterating the expiry of zero import duty by March 31, 2023 for met coal and coke imports except for Australia and Indonesia due to regional FTAs in place.
"If China reopens to Australia and tariffs are in favor of Australian coal, it could mean upward price pressures as spot demand will be sharply increased for high strength, low Ash and low sulfur Australian met coals to feed the Chinese blast furnaces," said an international trader.
Met and thermal coal disconnect likely to remain
The disconnect between met and thermal coal markets could continue in Q1 2023, despite a rising trend of met coal prices narrowing down the price spread between two coals, based on the market survey by S&P Global.
The year 2022 witnessed a global supply-demand mismatch in the thermal coal segment owing to weather disruptions in both Indonesia and Australia coupled with the outbreak of the Russia-Ukraine war in February.
Thermal coal prices soared right after the war broke out and then stabilized at relatively high levels. Market participants expect marine thermal coal prices to witness a surge in the event of fuel-switching by Europe due to gas supply shortage in the summer of 2023. However, the gas price cap decided by the EU is expected to keep a price surge under check.
"With a rising coking coal price now, it remains to be seen if the two coals will re-connect again in terms of price levels in Q1, but that will also be determined by the development of global steel markets," said a Singapore-based trader.
FOB Australia price direction
The Australian export prices across varying grades of met coal in Q1 2023 will likely continue to be driven by supply and demand factors, including the weather development in Queensland and the global steel demand for the period. In addition, the thermal coal price will continue to be watched closely during the winter time of the Northern hemisphere for indication of PCI and Semisoft coking coal prices.
The interplay between CFR China and FOB Australia could also see improved correlations if the Chinese imports re-open to Australian coal in Q1. Historically, CFR China pricing could be a ceiling FOB Australia, with exceptions in times of global supply disruption due to cyclones in the world capital of met coal production, Queensland. Based on the S&P Global data, an average price spread between PLV CFR China and FOB Australia was approximately $18/mt before the unofficial import ban.
"It's still a question mark whether China will fully re-open to Australian coal, there are reasons to believe that China will be watched closely again by the international market participants for their price impact on the rest of the world," said a India-based trader.