Teck, US coking coal miners continue to reap China premium on Australia coal ban

Miners Teck Resources, Coronado Global Resources, Warrior Met Coal, and the broader North American coal industry have emerged as key beneficiaries from the Chinese ban on Australian coal imports, as premiums for China spot sales continue through the first quarter.

Coal and met coke prices in China rose and exporters from markets such as the US, Canada, Russia and Mongolia with flexibility on production and marketing volumes offered tons to traders and buyers.

Canada’s Teck said it sees continued strong demand in China for its coking coal, after import restrictions were imposed on Australian coals in the fourth quarter, maintaining its target to sell 7.5 million mt to China in 2021. Teck boosted met coal output in Q1 by 22% to 5.9 million mt, from the year earlier.

“We will continue to prioritize available spot sales volumes to China, which is expected to continue to result in favorable price realizations,” Teck CEO Don Lindsay told analysts on April 28.

Teck sold 2 million mt to China in Q1 based on higher CFR China prices, compared with the Australian FOB price, with the difference adjusted for freight close to $100/mt, Teck’s senior vice president of marketing and logistics Real Foley said on the call.

Teck sold 6.2 million mt of met coal in Q1, up 9% on the year, and plans 6 million-6.4 million mt for Q2 sales.

China’s share of sales from North American mines has increased compared with Europe, Japan, Brazil, India and other contract markets. US miner Warrior said it will continue to prioritize long-term contract customers over allocating volume for spot sales to China, as a strike this month cut its production volumes. Warrior and Teck’s contract sales typically price off Australian premium HCC FOB indexes.

Long term customers

“We’re continuing to try to maximize sales to China. But as Don is saying, we have contractual commitments with long-term customers in other markets,” Foley said. “So we’re still looking at that similar target, 7.5 million mt for all of 2021.”

Freight from Canada’s Pacific terminals, such as the newly commissioned Neptune upgrade facility in Vancouver to China, was indicated currently in the low $20s/mt. Teck said it had loaded 18 vessels from Neptune.

Shipping times and costs from terminals in British Columbia to China, compared with US coals on longer voyages to Asia is one advantage for Teck and other Canadian met coal suppliers, such as Conuma Coal.

Coronado’s US coking coal mines Buchanan and Logan County have expanded production this year, to take on stronger demand from several markets, including “higher export pricing due to the CFR arbitrage” in China, said CEO Gerry Spindler in a Q1 report.

Traders and buyers now look to be more comfortable managing timing and performance risks in China, with no signs of China reversing its policy on Australian coal imports for the time being. High steel prices and Q1 pig iron production in China, along with demand for lower sulfur and low ash met coals to help reduce air emissions, has bolstered China’s import market, as incremental tons helped narrow a shortfall in Australian supply.

A trader handling US low-vol and mid-vol coals to China, which typically pays the highest seaborne spot prices on a FOB East Coast basis, said he was factoring in China’s restrictions for Australian coals staying in place for the foreseeable future, ruling out a resumption in imports for 2021 entirely.

“I think it’s too soon to conclude that it’s a long-term situation between China and Australia,” Teck’s CEO Lindsay said. “And then even if it was, the fact is you have to look at the market globally. You can’t be totally dependent on one country. And we have some really good, strong, important customers that we’ve had long-term relationships with.”

Coronado’s Spindler said China is importing non-Australian coals as the ban distorts market with higher China CFR prices. Coronado’s Queensland-based coals were not contracted to China, and earlier sold into the market sporadically, he said in the report.

“The timing of any change to the Australia coal ban remains uncertain, with Australian exports continuing to rebalance into more distant Atlantic Basin markets,” Spindler said.

Teck expected that met coal market was more likely to see current pricing mechanisms evolve over time. A dislocation since mid-October between FOB Australia coking coal prices with CFR China price indexes has encouraged some traders to look at hedging via CFR China PLV-based derivatives.

“So right now, we have a bifurcated market with two distinct prices. One is really good. We’re very happy with it. And yes, we wish we could sell more tons at the higher price, obviously,” Teck’s Lindsay said. “But I think if the market concludes that the geopolitical situation is long term, that the pricing mechanism will change, and that will be favorable to us. Some competitors won’t be available, too.”
Source: Platts