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Coking coal and met coke spread widens on procurement strategies

By Edwin Teo in Singapore

November 8, 2012 - The commonly accepted price relativity range between metallurgical coal and coke widened unexpectedly in mid-July to September, Platts data observed.

Yet this abnormal divergence had less to do with conventional explanations such as market inefficiencies or freight costs but more to do with spot or term coal procurement strategies, some coke sellers observed.

Coke producers who purchased mostly on spot also appeared to be in healthier financial state when compared to those who bought more on term.

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From mid-July to September, spot coking coal prices collapsed by $70.50/mt, signifying a 33% drop. Metallurgical coke, which is made from coking coal, however saw prices slip by only $44/mt, or 12% over the same period of time. The conversion cost ratio from coking coal to produce coke also witnessed a divergence.

A widely accepted range based on a survey done with several coke producers and coal procurement managers stands at approximately 1.40-1.60, which is supported by Platts price data between both commodities over a nine months period from October 2011 to mid-July 2012 at 1.40 – 1.70. This means that the price of coke is estimated to be 1.4-1.7 times that of premium coking coal.

This ratio is significant since coke procurement managers often use this to estimate the price for coke based on spot coking coal prices.

However this cost conversion ratio shot up to 1.6-2.1 from July onwards, as coking coal prices collapsed, highlighting less elasticity in coke pricing.

In spite of buyers’ repeated appeals for lower coke prices in view of a sharp plunge in coking coal, spot prices did not fall by the same magnitude as coke sellers refused to drop prices.

Based on an implied coking coal to coke price conversion ratio of 1.60 (from premium low-vol HCC import prices into India), buyers should have been able to expect coke at $240-310s CFR India during the summer months (see blue line), while in reality prices stayed above $320/mt

Market inefficiency caused by a smaller group of sellers was cited by a trader and a mill as the reason for causing a greater price disparity between coal and coke.

"Met coke is not as abundant as coking coal in quantity. It is a much smaller market." The trader estimates the seaborne met coke market at 3 million mt per annum in 2011 compared to coking coal which was 250 million mt. "It is not a fair comparison," he concluded. This was a point which was agreed by another large Indian mill.

Higher met coke freight costs, when compared to coking coal, also meant that sellers were more able to pass higher logistical costs to their customers, the first trader said.

Smaller coke shipments, from 5,000 to 30,000 mt, and further distances from Russia, Eastern and Western Europe, Japan and Australia meant that seaborne freight accounted for more on a CFR India basis for coke than on coking coal, he explained.

Next page: Spot against term

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