Material Matters: Coal, Chemicals, Steel & Oil

Commodities | Nov 04 2020

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

Coal

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.

Chemicals

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.

Steel

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.

Oil

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.


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