As China’s met coal price soars, these Aussie stocks could benefit
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Domestic metallurgical coal prices are surging in China off the back of supply issues.
Met coal is a key raw component used in producing steel and domestic prices hit yuan 4,035/mt (US$626/mt) on 8 September for premium low-vol hard coking coal in the Shanxi province.
That’s a rise of 45% from 11 August.
This year China has retired around 28.92 mt of old coking output capacity, and it’s increased its coking production capacity by 58.575 million mt.
This translates to a 29.655 million mt increase in coking capacity this year.
But it’s not enough.
According to S&P Global’s Joshua Leung, China is falling short of 50 million mt of met coal in 2021.
“China is expected to see a wide deficit for met coal supply in 2021,” he said.
“This comes at a time when China is vigorously putting effort at dual control of energy consumption and energy intensity, capping production of its high energy consuming domestic steel sector.”
China has been requesting steel mills to curb their annual production in 2021 either at or below 2020 levels.
Steel mills in provinces like Jiangsu and Shandong are gradually widening their output cuts – which are expected to accelerate in the coming weeks.
But China’s met coal sector has seen domestic prices soar.
Basically, the domestic met coal sector is finding it difficult to release back output capacity that’s on hold due to environmental controls – while import restrictions play a role in propping up met coal prices.
Leung said that data from China Securities International (CSI) showed that China’s met coal supply has been impacted by ongoing strict safety checks, the government’s policy of assuring sufficient supply and price stability for thermal coal and imported coal volume.
“CSI said it sees limited room for domestic met coal output to rise in 2021 due to state rules capping production, while coal mine accidents in the past few months have also squeezed ore supply,” he said.
In August, China’s National Development and Reform Commission agreed to let 15 coal mines in Inner Mongolia, Shanxi, Shaanxi, Ningxia and Xinjiang areas to extend joint trial production for one more year – on condition that they can only boost output by meeting safety rules.
The 15 coal mines, with a combined 43.5 million mt/year output, are expected to supply 150,000 mt/d of ore.
“Despite this, CSI sees the addition of domestic mined coal output limited in the near term, but expects coal output to rise in the medium to long run, on the back of government policy assuring supply of materials that are in shortage,” Leung said.
Not to mention the shutdown of the Ganqimaodu port in Inner Mongolia due to COVID cases restricted the inflow of Mongolian met coal imports.
“Since August, some coal truck drivers were tested positive for COVID-19 at Ganqimaodu, disrupting truck movements at customs clearance,” Leung said.
“Ganqimaodu, a land border port, is the largest channel for importing coal from Mongolia.
“Other industry sources said coal imports from North America are likely to take a long time to reach China’s shores, and were expensive, which has led to limited met coal imports from the US and Canada.”
Met coal going ballistic $CRN…. https://t.co/vrbM7TtaaX
— TwinTurboCelica (@TwinTurboCe1ica) September 15, 2021
Since China’s mills use almost 2 million tonnes of coal every day, the premium it pays above coal costs in the rest of the world adds up to about US$2 billion a week.
But it’s a problem of China’s own making, considering the decision to lock Australian imports out of the country last year distorting the market for the steelmaking fuel.
The ban has caused huge distortions in the global coal market, with separate Chinese and rest-of-the-world pricing developing for both metallurgical coals used by steel mills and thermal coal used by power stations.
But Aussie prices are seeing some improvement.
Earlier this month RBC Capital Markets updated its second half met coal forecast average from US$145/t to US$190/t.
Across the September quarter, estimated average prices Australian coking coal are US$200/t, falling to US$180/t in the December quarter, up US$60 and US$25 respectively.
Coronado Global Resources (ASX:CRN) is one Aussie player who could be set to benefit.
The company’s US operations continue to see higher Chinese demand due to the import restrictions on Australian coal.
And in its H1 report, the company said it expects to benefit from higher prices in the second half of 2021.
“As we look to the second half of 2021, we are buoyed by the prospect of prolonged higher metallurgical coal prices as steel demand continues to rise faster than supply growth driven by ongoing robust industrial output,” it said.
Then there’s Tigers Realm Coal (ASX:TIG), which sells its product out of the Bering basin in far east Russia.
And Putin’s coal is just fine for China.
The company saw prices for non-Australian hard coking coal soar in the back end of the 2021 financial year, doubling revenue to $14.765 million.
This quarter is looking even better for premium hard coking coal out of jurisdictions like Russia.