tsi 2016 met coal market in review (2)
TRANSCRIPT
THE STEEL INDEX (TSI) TSI Coking Coal Tim Hard Jarek Mlodziejewski Jing Zhi Ng
www.thesteelindex.com
Methodology – key points
• TSI methodology designed to maximise participation, minimise opportunities for manipulation and remove subjectivity from the process of index creation. Same as used for iron ore and Turkish Scrap.
• TSI uses physical market transactions to produce “daily spot value” reflective prices.
• Mathematical methodology – minimising human input/subjectivity.
• Regardless of market size/position, all data providers are capped at 40% should they be greater than that of the daily volume weighted average.
• No single data provider has exceeded 25% weighting over the lifetime of price publications.
• Non-Disclosure Agreements signed with index participants, enabling price data to be reported confidentially with no fear of disclosure to the wider market.
Please contact us if you have any more methodology questions
Setting the scene
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FOB PHCC Monthly Index AverageSpread to CFR PHCC (RHS)
On the first working day of 2016, Premium Hard coking coal (PHCC) exchanged hands for around US$77/tonne. Fast forward 11 months and the last traded PHCC cargo concluded at US$315/t on 8.11.16 on the globalCOAL platform. This year, the CFR China price has been below the FOB price for the first time, for three months.
Setting the scene
A key driver behind the surge in prices have been supply disruptions in Australia. This was boosted by increased Chinese demand as local weather disruptions conspired with the policy dictations of reducing the number of working days at collieries. In China, total coking coal imports in 2016 so far (with two more reporting months to go) have far surpassed those of all of 2015, standing a touch over 51 million tonnes.
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Cumulative 2016 tonnes over 2015 (RHS) 2015 2016
Chinese coking coal imports: China Customs Data
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$370
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16
FOB Australia Bid Offer Transaction
April 18, 2016: To solve its excess production and efficiency issues, China cuts the
number of statutory working days at coal mines from 330 to 276.
July 8, 2016: Recent roof fall events after a longwall movement leads to a
declaration of force majeure for Vale's Carborough Downs HCC.
July, 2016: Flooding in China impacts coal logistics. Coastal mills finding
it difficult to source coal from domestic mines.
August, 2016: Rail outage in Mozambique, affecting Vale’s coal
shipments.
Sept 7, 2016: Some of South32’s customers are served force majeure notices due to
geological problems at the Appin mine.
Setting the scene
Oct 3, 2016: Anglo American declares force majeure at its Grasstree longwall, affecting production
of its premium German Greek Coal brand.
August, 2016: Indian and European buyers enter the coking coal spot market in force,
scrambling to pick up tonnage in an effort to stay ahead of rising prices.
Nov, 2016: Chinese NDRC states that some mines can resume
producing at 330 days.
Trade Volatility
July 2016 marked a significant month with FOB prices crossing US$100/t. They ploughed on through September, with some fixed price deals over 10% higher (on a normalised index basis) than the one before. From July onwards, the average fixed price trade volatility (spread between two successive fixed price trades) was +2% whilst for the preceding 7 months it was +0.3%. The high was 22% in early September, followed by a trade 15% higher and then another 5% after that as the market price for coking coal soared.
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Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16
Premium HCC FOB market volatility
Index volatility (RHS)
% movement for successive fixed price trades submitted to TSI (Post normalisation)
Trade Volume
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ar 16
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ay 16
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Submitted FOB trades Submitted FOB bids/offers Price
Following the first sharp index movement in early September, there was a slight pause as market levels consolidated, however this soon changed as low inventory levels coupled with shortage of both Chinese domestic and seaborne material forced the hand of the market participants. Unfortunately for buyers, prices were already above US$250/tonne, and successive deal-making pushed the index over US$300/tonne.
Volumes Used in Index Calculation
Trade Size
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Volume Number of trades (RHS)
Overall FOB-based spot sales volumes stabilised over 2016 after the 2015 surge, as have the numbers of trades. TSI has so far recorded 153 trades FOB PHCC trades as of the 25th of November. This compares to 168 trades done in 2015 as a whole, and thus we should therefore see a similar value for 2016 on an annualised basis.
Trade Size
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2014 2015 2016 YTD
Mill
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Mean 54kt
Mean 55kt
Mean 67kt
Spot FOB PHCC cargo sizes of have been trending upwards, although the appetite for ‘big shipments’ i.e. full capesize vessels appears heavily reduced. The trend is towards 70-85kt spot purchases as a norm.
Trade Size
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Spot transaction in excess of 75kt Spot transaction less than 30kt
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Average sales sizes have trended up since 2014. Conversely, ‘top-up tonnes’ (less than 30kt in size) have all but evaporated in 2016.
PHCC Seaborne Spot Market
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FOB CFR CFR % of total PHCC spot trade
Total PHCC seaborne spot trade (including CFR trades ) is trending upwards. China has imported more in 2016 than 2015, breaking a multi-year decline of imported volumes and increasing its share of total trade from 21% to 28%.
Spot market activity remains robust through price surge
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Transactions Platform Bids Offers Price (RHS)
Data points per month: TSI PHCC, FOB Australia
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Transaction Platform Bids offer Price (RHS)
Volumes per month: TSI PHCC, FOB Australia
An average of a little over 16 physical market transactions per month underpin the FOB Premium Hard Coking Coal index over 2016. The year had an average 21 working days per month. Double-counting of trades excluded.
Market maker makes a splash on SGX.
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CME SGX SGX Share of total (RHS)
Tonn
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Physical producer market maker begins trading exclusively on TSI (SGX). SGX share of total Derivatives market rising quickly.
Open interest on a growth path.
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Open Interest SGX Open Interest CME
Tonn
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% of total coking coal derivatives trade
Open Interest (a proxy for levels of hedging, rather than speculative activity) has seen a rapid build on SGX.
Coking Coal – a long runway
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COKING COAL
COKING COAL
The physical size of global coking coal markets are far smaller than iron ore. Using the same growth path of iron ore shows the next annual volume milestone should be 11 million tonnes traded (2017). The large pool of iron ore hedgers and speculators at SGX can offset margins on opposing positions in coking coal.
Mill
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Tonn
es
0.01x 0.02x 0.04x 0.09x 0.20x 0.39x 0.75x
1.21x
Forward markets pricing ‘upside-story’ behind us
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Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
SGX Forward Curve
US$
/t
Forward market at SGX now firmly backwardated. Q1 2017 now at US$233: already US$52/t below the recently agreed ‘quarterly benchmark’ agreed at US$285/t.
Questions? Please contact us
Jarek Mlodziejewski Jing Zhi Ng Tim Hard 12 Marina Boulevard | Level 23 MBFC Tower 3 Singapore 018982 T: +65 6530 6412 M: +65 9108 4257 E: [email protected] Reuters Eikon: [email protected] ICE Chat: jarek_mlodziejewski Wechat: jarekm www.thesteelindex.com