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Material Matters: Coal, Chemicals, Steel & Oil

Commodities | Nov 04 2020

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A glance through the latest expert views and predictions about commodities. Coal; chemicals; steel; oil; and aluminium.

-Seaborne coking coal production cannot be absorbed without China
-Issues with coal spark concerns for explosives producers
-Further upside seen limited for US steel prices
-Oil inventory remains stubbornly high
-Pressure mounts on China's aluminium refiners


By Eva Brocklehurst


Since news of the informal ban by China on metallurgical (coking) coal imports from Australia, premium hard coking coal FOB Australia has fallen to US$109/t. Meanwhile, Chinese steel makers concluded two transactions for Canadian premium hard coking coal for January 2021 delivery.

Morgan Stanley notes Australian producers may be scrambling to find alternative destinations for spot cargoes but there is widespread scepticism China's ban will last into 2021. China has limited alternatives and a prolonged ban does not appear feasible for metallurgical coal.

Moreover, despite the ban, two vessels with Australian coking coal were offloaded in China in the last week and there are still more than 50 vessels carrying about 5mt of Australian coking coal positioned outside Chinese ports.

Morgan Stanley points to vessel tracking data that shows coal imports from all sources are affected, as cargo discharges slowed in China to just 2mt/week in October from 4mt/week in the September quarter. Some cargoes from Queensland are still headed for China but most are going to alternative destinations, even Europe, squeezing out some US exports.

Steel production may be recovering elsewhere but the amount of coal produced cannot be absorbed without China and many potential buyers of spot cargoes are on the sidelines, expecting the price will move down further.

Australian producers may have to cut shipments further in the December quarter to halt the current slide in price. As demand outside China recovers further and supply tightens on a seasonal basis, Morgan Stanley envisages the FOB Australia hard coking coal price approaching US$150/t in the first quarter of 2021. Before that, the price could dip below US$100/t if the status quo persists.


Systemic issues in coal accelerated throughout the September quarter and created particular concerns for the ammonium nitrate producers. Credit Suisse notes mined production in Latin America and Africa have lagged and recovery now appears to be more drawn out than originally anticipated.

This issue underpinned the October downgrade by Orica ((ORI)). The bear case for US coal gathered some momentum in 2020 and debate surrounding the exposure of Incitec Pivot ((IPL)) to this segment has increased.

The US Energy Information Administration assesses coal will grow in 2021 because of higher gas prices and growth in electricity consumption and then subsequently decline over the longer term as older generation units are retired.

Under this scenario, Credit Suisse estimates the sector will consume 680,000t of ammonium nitrate in 2025, sufficient to keep Incitec Pivot's plant loaded.

Orica has its key exposure at Bontang in Indonesia, with a lack of gas integration meaning plant economics are anchored to domestic demand. Coal production fell -19% in the September quarter as Indonesia weathered reductions in the global coal trade and domestic consumption fell.

Ahead of the pandemic, the NSW ammonium nitrate market was short and this provided a buffer for the company's Kooragang Island plant utilisation. As of August, Newcastle coal exports declined -8% on a rolling 3-month basis and removed around -40,000t of ammonium nitrate requirements from the market.

Nevertheless, Credit Suisse notes changes in volume at the margin would have been absorbed as Western Australia surplus capacity is exported to NSW.


Macquarie observes US spot hot rolled coil (HRC) prices have staged one of the sharpest rallies on record, to almost US$700/t. The rally has been underpinned by supply tightness as a substantial amount of integrated steelmaking capacity was shut down at the height of the pandemic and remains off-line.

Manufacturing activity has recovered faster than the broader US economy and the lead times of mills have extended to almost a 10-year high with sharp price hikes following. The issue now, the broker asserts, is whether the market is vulnerable to a gradual return of supply.

Temporary idled capacity which could return to the market consists effectively of four blast furnaces owned by ArcelorMittal and US Steel. Cumulatively, Macquarie estimates these account for 6mt as steel production, or around 12.5% of the US flat steel/HRC market.

Given the takeover of ArcelorMittal assets by Cliffs Natural Resources is in the wings it is unlikely the assets will re-open soon and there is a possibility this capacity may be permanently shut. Cliffs has long-term plans to turn around some of the iron making capacity to supply metal product to the growing electric arc furnace (EAF) sector.

Upside is limited, the broker assesses, as further price hikes are likely to drive an increase in imports and the next big move in steel prices should be down once the upswing in manufacturing peaks and the planned EAF expansions hit the market.


Too much oil is simply too much oil. Morgan Stanley notes several risks hanging over the oil market which are weighing on prices. While recovery looms, the broker suggests there are better entry points ahead. Namely later in the first half of 2021.

Oil inventory remains "stubbornly high" with visible stocks still above levels of a year ago and drawing down more slowly than supply/demand estimates signal. Morgan Stanley notes motor vehicle statistics have started to decline again with the rise in coronavirus cases globally amid renewed lockdowns. Commercial aviation is also not improving.

China's imports have slowed while Libya's production is rising. Since mid August Chinese crude imports have been trending lower and have recently fallen back to a five-year seasonal range. Libya's exports have been near zero for much of 2020 but in late September a ceasefire was agreed and force majeure at key ports has gradually been lifted.

US production estimates are also ahead of the broker's forecasts and the rig count is rising. Meanwhile, despite spare capacity being high by historical standards, Morgan Stanley envisages little room for OPEC to increase production as per its existing agreement. For the price to rally demand needs to pick up and the broker anticipates this is only likely in the second half of 2021.

Morgan Stanley also suspects, in the case where Joe Biden becomes US president, an Iran nuclear deal could be back on the table and result in more oil supply. Citi, on the other hand, considers the view that an election win for Joe Biden is overly bearish for oil prices greatly exaggerated.

It appears that Iranian exports may already be significantly higher than is commonly believed, with US officials finding reports of sanction evasions "troubling". The broker notes reports that Syria and China are importing Iranian crude and the quantity is likely to have risen to potentially more than 450,000b/d.

China has been importing large amounts of oil from Malaysia, where production has been down by around -100,000b/dm and there has been a discrepancy between reported imports from Malaysia and what third-party analysts note via cargo tracking.

Further muddying the waters, transfers to tankers of petroleum products, partially laden with oil from other countries or taken from storage where Iranian crude is already blended, makes it impossible to accurately estimate total Iranians exports.

Regardless, Citi assesses speculation of a 2mb/d increase in Iranian oil exports by the end of 2021 seems extremely optimistic. The broker suspects, post a Joe Biden victory, it would be unlikely Iranian crude enters the market freely by more than 500,000b/d in the first year of his presidency.


Refined aluminium output from China is growing and higher prices are improving margins and instigating even more output. Macquarie assesses this is supportive for alumina, although prices have been broadly flat since China emerged from the lockdown.

As a result, this signals there is no shortage of alumina out there and much of China's imports, which have risen 276% from January to September, have come from Australia, with Vietnam and Indonesia also shipping more tonnage.

Alunorte is ramping up again towards nameplate and Paragominas has resumed output. A softening of the seaborne balance and the appreciation of China's renminbi makes trade into China more attractive so Macquarie notes the pressure is now on Chinese domestic refiners.

Further upstream, the availability of bauxite has been putting pressure on prices at the raw material source. Bauxite volumes from Guinea may have retreated because of the rainy season yet Indonesian contributions have lifted and Australian shipments of bauxite to China remain firm.

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