According to the company’s website news release on February 21, 2023, Metallurgical coal prices have been volatile over the last six months, but relative to the dramatic circumstances that emerged as the Ukraine conflict got underway, the most recent half felt almost tranquil. In the first half of financial 2023, the PLV index ranged from a low of $188/t FOB Australia to a high of around $321/t, averaging $264/t. Remarkably, that represents a steep decline from the prior half, when the all–time daily record high of $671/t was established, and the average for the entire half exceeded the previous daily price record achieved during the Queensland floods of 2011. That is tantamount to running a full marathon where the constituent 400 metre legs are all faster than world record pace.
Non–premium Mid–Vol (MV64) has ranged from $167/t to $302/t; PCI has ranged from $181/t to $314/t; and SSCC has ranged from $139/t to $274/t.
Three–quarters of our tonnes reference the PLV FOB index, approximately, with that percentage being higher than twelve months ago due to the divestment of our stake in BMC during the second half of financial year 2022.
The differential between the PLV and MV64 indexes averaged 9% in the first half of financial 2023, the same outcome as the prior half. That is 6 percentage points below the five–year average.
The metallurgical coal market has experienced both feast and famine in the pandemic era, with periods of loss–making for some producers in calendar 2020 and the first half of 2021 having given way to fly–up and then scarcity pricing for much of the time since. Beyond the abrupt volte–faces on the demand side associated with lockdown and re–opening economics around the globe, the industry has also dealt with the presumptive clearing market, a supply side shock in lower–end coals in the wake of the Ukraine conflict, consecutive La Nina phases that hampered production on Australia’s east coast, and a generalised energy system shock that pulled already scarce metallurgical coals into power generation.
It is not just benchmark pricing that has swung wildly: spreads have also experienced unheard of volatility. The spread between China CFR equivalent and PLV FOB pricing averaged +$4/t in the four financial years prior to the pandemic (FY17–20). In financial 2022, the differential ranged from +$218/t to –$245/t and from +$140/t to –$21/t in the first half of financial 2023. Oh, and despite trading at elevated absolute levels, PLV FOB pricing somehow managed to spend much of the post–Ukraine period trading below FOB energy coal (Newcastle 6000kcal), and at times PLV was trading at a discount to lower–quality met coals. These developments were beyond extraordinary. In the coal trade, fact was certainly stranger than fiction in calendar 2022.
We have analysed the impact of trade distortions in detail previously. That discussion can be reviewed here. With the China–Australia trade apparently edging towards a resumption, the obvious question now is how will trade flows adjust if this distortion is a thing of the past?
Will participants swiftly revert to the kind of trade flows that pertained prior to the ban, when Australian exports of met coal to China averaged 37–40 Mtpa? As of today, a swift normalisation to pre–ban norms is much less likely than a tentative reset in calendar 2023. While in the medium–term trade flows are likely to converge on the intersection of logistical efficiency and optimised customer blending preferences, it is unclear exactly what the path to the medium–term will look like.
Some relevant considerations for assessing how the bilateral trade and broader industry may evolve include:
Already strong producer/end–user relationships in the Australian FOB market became even stronger as trade flows rebalanced swiftly when access to the Chinese market was lost. Long–term contract volumes committed to the FOB market will be honoured, and the long–term contract share of total FOB trade has increased. Equally, with the return of some bilateral trade between Australia and China, that bodes well for liquidity in the spot market and for robust price formation driven by physical fundamentals.
Mongolian and Russian sellers who have no other major competitive outlet than to sell to China (Mongolia due to geographic reality, Russia due to sanctions/self–sanctioning by alternative buyers) have significantly increased their exports into China. 57 Mt of China’s 74 Mt total imports in calendar 2022 (77%) came from these two sources, vs 33 Mt of 81 Mt in calendar 2020 (41%). Those volumes are likely to be sticky (and attractively priced for profit–challenged Chinese steel mills) and could grow as the end of zero–COVID eases logistical constraints at Mongolia truck border crossings.
Also in China, domestic capacity additions have reduced import requirements, with the discipline of the SSR period having been set aside somewhat under the record prices seen in calendar 2022. (More details below).
While loss–making prevails, it reduces the incentive for the median Chinese steel mill to compete aggressively to divert high quality Australian supply from the FOB market. Chinese BF–BOF steel margins are still negative early in calendar 2023, so the productivity and emissions benefits of premium coals are not as sought after by steel mills at this exact juncture as they would/will be under regular operating conditions (although there will be exceptions to this general observation among the largest, most sophisticated coastal mills). As we argue below, we expect the time will come when traditional value–in–use dynamics reassert under more normal margin conditions, but it does not feel like this is imminent.
India has moved into the #1 seaborne import position and its appetite is growing rapidly, versus steadier demand in the other major import regions. That is a relevant consideration for where the seaborne trade might clear in the medium–term.
The key hypothetical argument in favour of a swifter re–rebalancing would be a major wedge between Chinese and ROW pig iron production growth developing, as we saw in 2020. That though seems unlikely while the Indian economy (the largest seaborne importer of met coal, at ~70 Mt) is looking firm, but the potential for Europe (~45 Mt) and North–east Asia (~96 Mt) to be weaker than expected is certainly still there.
Moving on to the supply side fundamentals, overall seaborne supply was just 290 mt in calendar 2022, –1.7% YoY and –22 Mt from calendar 2019 levels. Adding changes in Mongolian landborne exports to the mix, total supply is –30Mt versus 2019, a –9% decline. Note that global pig iron production has fallen by –1.1% on the same basis. That comparison clearly illustrates that one major driver of tight metallurgical coal markets has been the difficult operating conditions the industry has experienced in the pandemic era.
Looking at the performance of the major regions, both in 2022 itself and versus 2019, it becomes clear that operational challenges have been multi–regional and enduring. Australian shipments experienced another difficult year in calendar 2022, with supply to the seaborne trade down –4.2% to 160 Mt. That is the third consecutive year of YoY decline for Australia (matching the string of three consecutive La Nina weather patterns) with 2022 exports down –20 Mt from the calendar 2019 level. North American exporters saw flat YoY tonnages in 2022, but like Australia, volumes for Canada (–8 Mt vs 2019) and the US (–7 Mt vs 2019) are still well short of the pre–pandemic baseline. Mongolia has been logistics constrained through the COVID–19 era, but it was able to boost shipments +12 Mt in calendar 2022 from the 2021 nadir, although the 2022 flow remains –24% below 2019 levels. Russian exports have increased marginally since 2019 (+5 Mt), with their reliance on China as a destination market (from one–fifth of exports in 2019 to three–quarters in 2022) the major story.
In China, run–of–mine hard coking coal capacity has been allowed to lift from the 2019 trough, the level of which was dictated by supply–side reform mandates. Notably, it appears that the recent increases have raised capacity above 2015 levels. The capacity increases (and some local regulatory forbearance that has increased effective capacity) have enabled hard coking coal production in 2022 to edge up +1% YoY despite operational challenges under zero–COVID. Production in 2022 was around +4% higher than 2019 levels (+18 Mt). The PLV proportion of that though has been relatively flat between 25 Mt and 28 Mt in the 2019–2022 period.
Longer term, we argue that a policy focus on safety, environmental considerations, and financial sustainability in Chinese coal mining, in addition to the intent to embark upon a decarbonisation path for steel making, should highlight the competitive value of using high quality Australian coals in China’s world class fleet of coastal integrated mills. As we argued here, China’s steel industry is still in the optimisation phase of its decarbonisation journey, in which higher quality raw materials make a clear difference to the energy and emissions intensity of the BF–BOF route, which accounts for around 90% of Chinese and around 70% of global crude steel production.
In coming years, most committed and prospective new metallurgical coal supply is expected to be mid quality or lower, while industry intelligence implies that some mature assets are drifting down the quality spectrum as they age. Additionally, the regulatory environment has become less conducive to long–life capital investment in the world’s premier PLV basin – Queensland. The relative supply equation underscores that a durable scarcity premium for true PLV coals is a reasonable starting point for considering medium terms trends in the industry.
The advantages of the highest quality coking coals with respect to GHG emissions are an additional factor supporting this overarching industry theme: an advantage that will be increasingly apparent if carbon pricing becomes more pervasive.
The flip side of the burgeoning advantages of PLV, as derived from the fundamentals discussed above, is that the non–PLV pool of the industry could face headwinds for an extended period in the disrupted post COVID–19 world. This could, however, be obscured for a time while FSU supply uncertainty lingers.
On the topic of technological disruption, our analysis suggests that blast furnace iron making, which depends on coke made from metallurgical coal, is unlikely to be displaced at scale by emergent technologies this half century. The argument hinges partly on the sheer size of the existing stock of long–lived BF–BOF capacity (70% of global capacity today, average fleet age13 of just 11–13 years in China – the major producer – and around 18 years in India – the key growth vector). It also highlights the lack of cost competitiveness and technological readiness (or both) that is expected to inhibit a wide adoption of potentially promising alternative iron and steel making routes, or high–cost abatement levers such as hydrogen iron making and carbon capture and storage, for a couple of decades at least in the developing world. Notwithstanding the sweet spot in profitability in calendar 2021 under record pricing in many regions, steelmaking is typically a low margin industry where every cent on the cost line counts.
We certainly acknowledge that (a) PCI could be partially displaced in the BF at some point by a lower carbon fuel, and (b) the well–established electric arc furnace (EAF) technology, charged with scrap and without any need for metallurgical coal, will be a stern competitor for the BF at scale to the extent that local scrap availability allows. In a decarbonising world, EAFs with reliable scrap supply running on renewable power should be very competitive. We assess that the emerging technologies that are expected to feature in a low carbon end–state for the industry, such as green hydrogen enabled DRI–EAF and DRI–ESF, are some decades away from being deployed at scale. Accordingly, we expect that the industry will need to be a purchaser of carbon offsets (as required to meet regulatory or voluntary commitments) for a considerable period of time even as it positions itself to pursue long run carbon neutrality.
Information on our six Scope 3 MOUs with China’s China Baowu and HBIS, Japan’s JFE Steel, South Korea’s POSCO, India’s Tata Steel and European multinational ArcelorMittal are available elsewhere on our website.
