Chart of the Day: China’s coking coal imports dip in January, but restocking around the corner
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China’s coking coal imports fell by 19% y/y in January on reduced restocking demand, as steel mills were reportedly well stocked in preparation for increased activity after the Chinese New Year holiday period. The theme of restocking will continue into March as mills assess their stocks ahead of authorities lifting China’s restrictions to industrial activity in just over a week’s time. Reports suggest that mills have remained on the sidelines over the last few weeks, hoping for coking coal prices to fall further before restocking.
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With restrictions to China’s steel output about to be lifted, steel mill margins will once again come into focus. Elevated steel margins encourage steel mills to boost output, increasing demand for iron ore and coking coal. And while China’s plan to close another 30Mt of steel capacity made news this week, that would still leave ~200Mt of official spare capacity in China. Unofficially that number could be higher. More importantly, the spare capacity gives enough headroom for Chinese steel production to rise higher. Slowing steel demand growth in China should curb any strong steel supply growth, but elevated margins remain a key upside risk to our steel production outlook.
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China’s domestic coking coal supply remains the other major driver of coking coal prices. Improving rail transport infrastructure should help support China’s coal production, which has been constrained by safety checks, and more recently, cold weather. Our confidence that China’s domestic production will recover reflects the domestic coking coal contract signed by Shanxi Coking Coal Limited at RMB 1300/t (Free‑On‑Rail) (or ~US$160/t (FOB Australia) for 2018. With spot prices at ~US$235/t (FOB Australia), Chinese steel mills will look to cheaper domestic coal. The agreement effectively sets a floor price on seaborne coking coal prices this year.
CKA Price at posting:
4.4¢ Sentiment: Buy Disclosure: Held
