Australian coking coal prices, in the last one month, have plunged by $157/t (32%). The premium HCC is currently assessed at $285/t, FOB Hay Point basis. The prices have now touched 10-month lows with the current change in trade dynamics and global steel demand turning sluggish.
Post-war trade scenario
The Russia-Ukraine conflict and subsequent sanctions on Russia by western and a few Asian countries have led to increased demand for Australian coal in those countries. However, changes in China and India’s coal sourcing has adversely impacted the Australian coking coal prices in June.
China-although not a direct importer of Australian coal but world’s top steel producing country impacts the global coking coal market. Post war, it is not interested in sourcing coking coal from its traditional source like U.S. and Canada and is booking Russian coal available at discounted prices, indirectly triggering the price fall in coking coal prices across all the origins.
In case of India- top buyer of Australian coal, is also looking for cheaper Russian coal, impacting the former’s demand.
Interestingly, so far in 2022, Russia’s share in China’s coking coal imports have increased to 33% against 20% last year. Both countries had set up a yuan (RMB)-ruble payment mechanism only after a month of the onset of the Ukraine war in last week of February.
In case of India, the country has started importing more of Russian coal from June as buyers were scouting for a payment route. In June, 0.28 mnt of coking coal were imported compared to very less volume in the previous months.
Why has steel demand weakened since June?
HRC (hot-rolled coil) export prices of key countries
Europe
Steel demand in one of the top two global consuming geographies, Europe, has turned sluggish since a month amid weakened manufacturing demand combined with inventories that were replenished following Russia’s invasion of Ukraine. The high commodity prices and surging inflation have dented consumption in the EU manufacturing sector.
The auto sector in the EU is struggling to meet sales targets amid high inflationary pressures, supply chain woes and chip shortages. In fact, global car sales are expected to fall to 67.6 million from last year’s 71.3 million. Sales were thought to have bottomed out in 2020 at 68.6 million after diving from 79.9 million in 2019, as per Germany’s Center for Automotive Research.
China
Chinese steel demand, which was expected to pick up in June, post-removal of Covid-restrictions, failed to pick up amid the debt-strapped property sector. The country’s manufacturing index, PMI, in June stood at 50.2 against 49.6 in May. But the inventory piled up with steel mills are 12% higher y-o-y and may take nearly two months to fall to the median levels of the last five years, assuming that steel demand roars backs to life. This seems a bit unlikely, and will affect demand for a key ingredient, coking coal.
India
The Indian government had announced an export duty on steel in the last week of May and its impact was seen in June. With Indian steel becoming less competitive in the global market, the country’s demand for coking coal took a hit. In addition to this, domestic demand has also slowed down especially from a key steel-consuming sector like construction. This has made Indian buyers move to the sidelines where coking coal purchases at higher price are concerned.
What lies ahead?
Amid changed trade dynamics and bearish demand sentiments in India, Europe and China, coking coal prices are expected to fall further. However, if Australia experiences excessive rainfall, supply constraints will emerge and which may provide some support to prices in the near term.
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