The seaborne premium hard coking coal market posted its biggest weekly gain August 19 since the 2011 floods in Queensland, Australia, as a supply shortage in China, the world's largest producer of the steelmaking raw material, prompted end-users to scramble for spot cargoes.
Logistical bottlenecks, including road repairs and slower rail haulage in China's coal producing hub of Shanxi, were responsible for the recent supply squeeze, according to industry insiders.
Platts-assessed spot premium low-vol hard coking coal prices jumped $11/mt to $125.50/mt CFR China during the week ended August 19, the largest increase since February 2011, and a price level not seen since September 18, 2014.
Prices of prime hard coals from Australia rose $8.75/mt to date this week, to be assessed at $117.25/mt August 19.
Market sources said several Shanxi highways were closed for repairs following heavy rains at the end of last month that caused flash flooding in Taiyuan city in Shanxi.
There was also a shortage of railway wagons, partly caused by increased haulage for steam coal, three sources told Platts.
As a result, Chinese end-users were this week seen scrambling for metallurgical coal cargoes from Australia, Canada and Indonesia, which were priced several dollars above domestic alternatives.
China's import-domestic price gap in the prime hard segment widened to $20.42/mt Wednesday, the largest since Platts began its weekly PCC Met Shanxi Premium Low Vol domestic coal assessments in April 2015.
"There's a real demand-supply mismatch at the moment because China is definitely short of coal and there's also not much international supply coming in," a source from an international trading company said.
There were also persistent seaborne supply constraints, with several Queensland HCC mining operations undergoing maintenance or facing production issues in the second half of this year.
Roof fall incidents at Vale's Carborough Downs and Anglo American's Grosvenor mines in Australia have disrupted production, while Vale stopped moving coal on the Sena railway to the port of Beira in Mozambique due to attacks by gunmen last month.
These supply constraints, as well as healthy Chinese mill and coke plant margins, have fuelled a sharp hard coking coal price rally since the end of May. Prices have risen 36% since May 27, after rising 28% over February-May.
"Mills want to take advantage of stronger steel prices by buying more coal and ramping up output," an east China steelmaker said Friday.
Platts assessed Q235 HRC 5.55 mm thick in Shanghai, which has reasonable correlation with met coal prices, at Yuan 2,795/mt with 17% VAT Wednesday, up Yuan 95/mt since the start of August. North China coke prices surged Yuan 180/mt over the same period.
ACCESS CHALLENGE
Although Chinese coal was currently priced much cheaper than seaborne alternatives, buyers have been facing difficulties accessing domestic supply in recent months, market participants said.
This was partly due to China's bid to cut capacity in its coal industry by reducing the number of statutory working days for its coal miners to 276 a year in March from 336 earlier.
Chinese domestic coal prices do not react as fast as seaborne prices to changing conditions because large producers, which are mostly state-owned, typically revise their prices only at the end or the beginning of a month, sources said.
China is the largest spot buyer and the clearing market for all categories of met coal, accounting for 68% of the global spot volume of 34.7 million mt in the first half of the year, Platts data showed.
Buyers in China are also among the world's most price-sensitive consumers of seaborne coal due to a massive domestic supply base, sources said. But the current anxiety in China over supply has pushed spot deal prices higher than in other importing countries like India and Japan, according to Platts data.
The current price rally has also intensified re-trading of spot cargoes and longer trading chains as trading firms exploit the steep contango structure of the market.
For example, one tier-two HCC cargo was reported changing hands five times between May 31 and August 11. The eventual seller of the cargo -- who had previously bought the same shipment twice -- reaped a profit margin of up to $17/mt.
The sharp spike in this week's prices drove the paper market into a backwardated structure. Platts assessed premium low-vol listed on the Chicago Mercantile Exchange for September, Q4 '2016 and Calender 2017 contracts at $116/mt FOB Australia, $116/mt FOB Australia and $115/mt FOB Australia respectively August 19.
RALLY COULD LAST
Most market participants said the downside risk for prices in the near term was limited as tightness in Chinese and Australian supply was expected to persist.
"Where's the weakness going to come from? Supply tightness is the biggest factor," an international trader said. "If things change, [the market is] not going to drop by $5/mt tomorrow as there's more upside than downside at the moment."
Another trading source said the re-emergence of Indian demand after the monsoon season could further sustain the price rally.
"We had already forecast that prices would rise slightly, but with the strong demand in China, those that had rejected the bullish view have already revised their outlook," an Indian end-user said. "Q3 cargoes were sold out very early and now we are planning further ahead for Q4."
However, a few sources said surging prices could spur greater production from swing suppliers in the US and Mongolia, which could halt the rally.
"At current prices, we'll soon see the next tier of US supply kick in," a US exporter said, adding that a Q4 Asian benchmark price of $100-$103/mt FOB Australia for premium coals would ignite impetus for greater US supply.
