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Interview: Daisy Tseng, Steel Raw Materials Editor, Metal Bulletin

Daisy talks to Coaltrans about the rally in coking coal prices this year, the divestment of Anglo American’s Grosvenor and Moranbah assets and what would happen if BHP Billiton were the new owner


Coaltrans Conferences (CC): In your opinion, what factors can be attributed to the rally in coking coal prices this year?

Daisy Tseng (DT): The main factor is the supply-side response. This year we see China determined to tackle its steel and coal overcapacity and the government has ordered coal mines to cut working days to 276 days a year, from the previous limit of 330 days. This has created tightness in the market and supported coking coal imports. According to the latest customs data, China’s coking coal imports for the first half of this year rose some 26% from the same period a year ago.

The supply tightness was also felt in the Atlantic market as the effect of various mine closures in the USA and Canada over the past two years have kicked in. US coking coal exports in the first half were down 22.5% year-on-year.

There have been some shorter-term impacts too. In Queensland, Australia, heavy rainfalls in February and July saw several mines lose 5-10 days of production. Wesfarmers’ Curragh and Vale’s Carborough Downs also declared force majeure as a result of these rainfalls. Mining issues were experienced in several other mines too. 

Another factor is the futures market in China. This year, we see more intertwining of the physical and the financial markets. Participants who have locked in positions on the Dalian Commodity Exchange would not mind paying a few more dollars to secure a physical cargo for delivery. These higher-priced deals in turn pushed up the market.


CC: How is the booming steel industry in China and the subsequent decline in steel-making activity in Europe changing the dynamics of the seaborne coking coal industry?

DT: Chinese buyers are sensitive to prices of seaborne coking coal as the country has enormous domestic coal reserves. Imported materials accounted for less than 10% of the country’s total met coal consumption.

When the Chinese steel industry boomed, demand for seaborne coking coal increased and led to the development of a liquid spot market.

This in turn led to growing relevance of spot prices and benchmark indices and set a reference for other markets to follow.

Chinese demand has since become an important factor in interpreting and forecasting spot prices.


CC: How do you predict M&A activity in the industry will impact on trading culture, pricing and coking coal as a commodity?

DT: At the moment, all eyes are on the divestment of Anglo American’s Grosvenor and Moranbah assets because one of the strongest contenders is BHP Billiton.

BHP Billiton is known as the advocate for shorter-term pricing in the coking coal market. As the biggest supplier of coking coal, the mining major has successfully managed to sell the majority of its products with linkage to indices or on the spot market. This means that most of its sales are based on “market price”.

Anglo American, on the other hand, was still happy to support the quarterly benchmark system with many of its more traditional customers.

If BHP Billiton were to be the new owner, the quarterly benchmark system is likely to be further undermined. The pricing power in the prime hard segment of the market will also be in the hands of BHP Billiton, while the commoditization of coking coal will be accelerated.

If the assets were sold to other contenders, the pricing mechanism is likely to stay little changed in the near term.


CC: The premium hard coking coal index has the highest liquidity and market profile. Given this, do you see it serving as the single market benchmark, and if so, is there still a necessary place for 2nd tier, hard coking coal indices? 

DT: I do see a necessary place for an index to represent second-tier hard coking coal.

If second-tier hard coking coal was always performing according to premium hard coking coal, you should see the price spread between the two being consistent. But that’s not actually the case.

Over the past few years, the spreads have generally become smaller. This is primarily driven by China where lower ash and sulphur content is valued more, following increased usage of domestic coking coal, which typically has high CSR but also higher ash and sulphur. So we see Chinese customers paying more for second-tier hard coking coal than other markets on the back of their particular blending requirements.

In comparison, mills in Europe or India, when the price spreads between premium hard coking coal and second-tier materials narrowed, they wouldn’t mind paying a little bit more to buy premium hard coking coal.

This kind of preference created a very different demand scenario.

On the supply side, premium hard coking coals are more commonly seen in the spot market with most traders having access to this segment of the market. Second-tier hard coking coal, on the other hand, have more limited spot supply.

As there are various demand and supply factors in play, it means there is need for a separate index for second-tier materials.


CC: Having attended many Coaltrans events in the past, what is it about our conferences that brings you the most value?

DT: Coaltrans events are where key industry participants come together to exchange market information and intelligence. It is where important business conversations take place and relationships are forged.



You can hear more from Daisy at The World Coal Leaders Network where she will be delivering a metallurgical coal price forecast.

 

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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