China saves the day for coking coal supply woes

By Titus Zheng, FIS Singapore

Like a knight in shining armour, China has saved the damsel in distress – the coking coal market – by changing roles from a net importer to an exporter and in the process keeping the market afloat.

This strange phenomenon was observed when Cyclone Debbie made landfall on Queensland, Australia and disrupted railway supplies from the mines. Unlike previous cyclones that hit Australia such as Cyclone Yasi in 2011, the ports of the Queensland coasts did not suffer any significant damages.

Neither did the mining complexes on land see much impact, thanks to the enhanced water management systems put in place. But the railway lines that linked mines and ports bore the blunt of damage and were forced to suspend operations.

“The railways disruption in Queensland has caused coking coal prices to double in three weeks,” said Edwin Yeo, senior managing editor of Steel and Raw Materials from S&P Global Platts during the recent Singapore Metals Forum 2017.

The sudden price spike can be traced to the cyclone-damaged Goonyella rail line which carries nearly 50% of coal supplies. With less coming to the ports for shipped for the global market, a bottleneck was formed that prompted global coking coal buyers into a scramble for the dwindling resource.

Then China took on the mantle of saviour and began bailing out the market from its supply woes. “China has changed its trade flows and switched to being a swing supplier overnight,” said Yeo.

Before Cyclone Debbie, China was the biggest spot buyer of coking coal in Q1 with total seaborne spot trade of 19.4 million mt, with Australia supplying up to 86% of spot tonnage. Post-cyclone China emerged as the top exporter of coal at 51%, while Australia barely accounted for 1%.

According to Platts, the Chinese spot met coal exports during the cyclone period consisted of 87% previously imported coals with only 13% of Chinese-originated coals. Most of the imported coals were believed to be Australian origin with the Chinese end-users re-selling cargoes to meet short term supply woes of other Asian importers such as Japan or South Korea.

Besides China, other suppliers had also joined the rescue for the supply shortage, with North American exports expanding to 27% during the cyclone from 10% in Q1 2017. Mozambique and Russia also increased their shares in the coal supply accounting to 9% and 8% respectively during cyclone period.

For Yeo, China’s switch from an importer to an exporter was a purely opportunistic move, not intended to be a long term change as Chinese end-users had stocks on-hand after building inventory during pre-Lunar New Year restocking.

“The Chinese end-users are willing to re-sell Australian coals based on three conditions; first, most are fully stocked up. Second, spot prices are higher than what the Chinese end-users previously bought at. Finally, the current domestic coal prices have not risen, causing a time-lag effect which mills can capitalize on.” he explained.

Unless these conditions are fulfilled, he believed that China will continue to be a net importer of met coal as the country lacks low ash materials as well as high quality coal. Moreover, the Chinese government will continue to curb coal use as part of its supply-side reforms, prompting a shortage in the short term.

Overall, Yeo concluded that the coking coal market is very supply-sensitive; where events like natural disasters can change trade flows to China and vice versa with a dramatic effect on the global market.

“Coking coal buyers might need to shift their met coal blends to be more multi-origin to mitigate trade disruptions” advised Yeo.