Tuesday, November 18, 2014

Outlook divided in Asian met coal spot market on abolition of Chinese tax

The Asian seaborne metallurgical coal spot market on Monday November 17 was divided on the removal of China’s import tax on coal under the country’s free-trade agreement with Australia.

After officially concluding its negotiations with Australia on the pact on Monday, China has agreed to lower the duties it recently started imposing on imports of coking coal and thermal coal. 

The tariffs on coking coal will be removed "on day one" while that on thermal coal will be phased out over two years, according to Australian government.
The removal of the import tax will improve sentiment, especially in the seaborne spot market, a trader said.

However, other market participants had a more tempered view of the free-trade agreement.

"The import tax relief is definitely good news for traders, but without a detailed schedule, its effect is difficult to say," a trader source. The market is still digesting the tax implemented in mid-October, so it will take time for the latest policy to take effect once it is finally introduced, the source added.

The import tax relief on Australian coal goes in the opposite direction of a rumoured cut in China's export tax on domestic coal, which is seen as a bid to ease oversupply in the domestic market, an end-user source said. 

Steel First's cfr Jingtang premium hard coking coal index edged up by $0.19 per tonne to $122.31 per tonne on Monday, while the hard coking coal index lost $0.56 per tonne to $111.15 per tonne.

The fob Australia indices were both unchanged, at $112.79 per tonne for premium hard coking coal and $100.52 per tonne for hard coking coal.

On the Dalian Commodity Exchange, the most-traded May coking coal contract closed at 773 yuan ($126) per tonne on Monday, up 4 yuan ($1) from last Friday's close of 769 yuan ($125) per tonne. The most-traded May coke contract closed 1 yuan ($0.20) higher, at 1,065 yuan ($173) per tonne.

China’s coking coal imports to halve by 2020, CLSA says

Chinese imports of coking coal are forecast to decline to just 30 million tpy by 2020 from 60-70 million tpy now, according to equity broker CLSA.

This is due to the broker's expectation that the country's steel consumption will peak before the end of this decade as urbanisation slows, and infrastructure and construction demand start to decline. In addition, ex-China demand will draw supply away from the world's second-largest economy, CLSA said in a recent research note.

China is the largest importer of seaborne coking coal and has been the clearing market as its steel production grows. During the first nine months of this year, the country imported 44.34 million tonnes of coking coal, according to Chinese customs. 

In 2013 as a whole, China imported 75.39 million tonnes of the steelmaking raw material. 

But CLSA argues that "in some respects the country can be viewed as a net exporter given the volume of coking coal exported in the form of coke and steel".

China exported a total of 73.89 million tonnes of finished steel during January-October, up 42% year-on-year, while its coke exports amounted to 6.56 million tonnes during the first ten months of this year, more than double the volume seen in the corresponding period last year.

CLSA forecast the quarterly benchmark for hard coking coal to stand at $115 per tonne fob Australia for the first quarter of next year and $120 per tonne for the second quarter next year. These are down from its previous forecast of $130 per tonne.

"However, we do believe prices will not worsen from here, as there has been a significant destocking in north Asian markets in 2014, and supply discipline is beginning to take effect with many mine closures announced this year, the benefits of which should be felt by the market in 2015," CLSA said.

It forecast the hard coking coal quarterly benchmark to average at $123 per tonne fob Australia next year, $138 per tonne in 2016 and $148 per tonne if 2017.

"As supply cuts are finally being seen, the market should gradually be able to move away from relying on Chinese marginal buying," CLSA said.

India is expected to be the top importer of coking coal by 2018, the broker said. However, it will take time for the country to drive a strong recovery in prices as it "first needs to absorb the surplus of seaborne coal which is currently sold into China". 

CLSA forecast India's share of global imports of coking coal to rise to 24% by 2020 from 14% this year.