China Iron and Steel Association summoned the improvement of term contract mechanism for coking coal as a measure to ensure price stability, after an acute supply shortfall pushed the steelmaking coal prices to record highs over September-October this year.
Luo Tiejun, vice chairman with the CISA, suggested at the national coal trade fair on December 3 that China should improve coking coal mid- and long-term contract mechanism and take measures to further raise the contract fulfillment rate (in both volume and coal quality) to help stabilize prices.
China is the world’s top coal producer, with coal output, at 3.9 billion tonnes in 2020, accounting for 50% of the world’s total, but in lack of premium coking coal shortage due to low recoverable reserves and heavy dependence on imported supplies.
Coking coal reserves account for around 19% of the total in China, only 13% of which are recoverable reserves. Premium grades, including primary coking coal and fat coal, account for around 37% of the total recoverable reserves.
The country imported more than 70 million tonnes of coking coal in both 2019 and 2020 to fill its domestic supply gap, yet the decline of imports from the traditional two major sources – Australia and Mongolia – respectively due to worsened relationship and deteriorative pandemic have continued to compound the supply shortfall this year, pushing domestic coking coal prices to historical highs in September and October.
Fenwei CCI index for Shanxi low-sulfur primary coking coal surged to an all-time high at 4,265 RMB/t in around mid-September, more than tripling the year-ago level.
High coking coal prices had significantly eaten into profit margins at coking plants, affected normal activities in downstream firms and resulted in high costs in construction and manufacturing sectors.
China has ordered major miners and power plants to sign mid- and long-term thermal coal supply contracts to cover most part of their demand, but put limited mandatory requirements for coking coal supply contracts, whether in the fulfillment rate or coal quality.
Long-term contract prices of coking coal have been deviating from the market price. Some term contract prices exceeded the market prices for the same-quality coal by 60-120 RMB/t in 2019.
While spot coking coal prices continued declining, the prices of term contract prices only slightly reduced. Some major miners’ coking coal contract prices even increased in the second quarter in 2020 when market prices were on the downtrend, with the spread reaching a multi-year high of around 170 RMB/t in April, Sxcoal learned.
Taking the 2019 annual reports from listed coal and steel companies as example, the top ten steel firms in revenue reported a 48% year on year decline in net profit, while the top six miners reported 3.73% increase in profit.
In October this year, miners enjoyed a fat profit while steel mills and coke firms were under operational pressure due to unaffordable costs of raw materials.
Besides, of the total profit in coal mining sectors, coking coal contributes the largest share.
To achieve mutual benefit and win-win situation for mines, coking plants and steel mills, it is crucial to further improve term contract mechanism for coking coal, helping downstream users to stabilize procurement costs and ensure stable sales at mines at the same time.
This insight has been published under an article exchange agreement between CoalMint and SX Coal.
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