London (Platts)--18Dec2012/752 am EST/1252 GMT

The lifting of the Chinese duty of 40% on met coke exports starting January 1 is negative for the seaborne met coal market, based on replacement by more coke from China, said Brean Capital.

Chinese coke "will be substantially cheaper than before" and Mongolian met coal exports could rise into China, the New York-based investment bank said in a report released Monday.

The move may replace seaborne coal demand to produce coke at captive and merchant plants in coking coal import dependent countries such as India and Japan.

Brean Capital expects the net result of the measure could be a reduction in seaborne coking coal demand of 15 million mt -- equivalent to around 5% of the total global met coal seaborne market -- should Chinese coke exports return to the 15 million mt/year level seen in 2007 pre duty imposition from around 1 million mt.

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"We believe that met coal names stand to face lower overall seaborne met coal demand on this confirmation of China's removal of the export duty," he wrote on the impact to mining companies.

International met coal price have risen further than Chinese coke prices, and therefore coke prices are not as expensive, providing incentives to replace coal with coke, analyst Lucas Pipes suggested.

The hard coking coal benchmark has risen about 65% to the Q1 benchmark of $165/mt FOB Australia since 2007, while spot coke prices in China are only about 35% higher over the same period, he said.

"As seaborne coke prices have closely followed the seaborne met coal price, we find that, based on our numbers, the spot export price of Chinese coke has simply not kept pace," Pipes wrote in the note. "This would lead us to believe instead that, on a relative basis, Chinese coke is not more expensive today."

Brean Capital highlighted that prior to an increase in costs and the duty, China exported roughly 15 million mt of coke in 2007, or almost 5% of its annual production.

"As cokemaking requires roughly 1.4 tons of met coal to produce each ton of coke, [a 14 million ton increase in exports] would potentially remove nearly 20 million tons of seaborne met coal demand from the nations that China's increased exports would be delivered to," it said.

Coke pricing pressure will likely affect coke producers in Japan, Colombia, and Russia, while Asian steel mills could import Chinese coke and the "currently weak seaborne met coal market could suffer."

Meanwhile, Chinese seaborne met coal demand may slightly increase assuming that 25% of the extra Chinese coke production is supplied by seaborne suppliers, adding 5 million mt in met coal demand for the 15 million mt China coke export scenario, it said.

--Hector Forster, hector_forster@platts.com
--Edited by James Leech, james_leech@platts.com

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