This five-part story series examines the coking coal market from a few angles. This first part focuses on pricing evolution and spot liquidity. The second analyzes how trade flows have changed, the third traces the rising importance of environment, social and governance criteria, while the fourth takes a deep dive into the workings of coal trading platforms that may inform spot price assessments. The final part examines the current state of the spot market and explores directions for future evolution.

Shifts in the way a commodity is priced often result from major economic and world events and coking coal is no exception, having witnessed the pricing mechanism for long-term contracts move from annual negotiations toward spot-linked pricing over 2010-2012 as spot prices crashed due to a sovereign debt crisis in Europe, a shaky US recovery from the 2008 global financial crisis and China's sagging under the weight of ballooning domestic steel capacity.

While earlier annual benchmark negotiations were led mainly by major steelmakers in Japan and Europe, Chinese steelmakers had an increasing say through their activity in spot markets as growing steel capacity fueled their appetite for coking coal imports.

More than a decade on, the coking coal market has not looked back on its price indexation journey, although a new set of events – the pandemic, China's unofficial ban on Australian coal, erratic weather and the Russia-Ukraine war – may see a change of guard in terms of spot market activity, chiefly by India and Russia.

Brave old world

The path that coking coal embarked on in its indexation journey is a well-trodden one. Not only did iron ore pave the way a couple of years earlier, when then BHP Billiton CEO Marius Kloppers broke away from the annual benchmark system in favor of spot pricing – many other commodity markets effectively already had some form of floating price mechanism in place based on published price indices, including assessments published by Platts, part of S&P Global Commodity Insights.

While vestiges remain, as in the case of some semi-soft coal and pulverized coal injection contracts which are set via quarterly negotiated fixed prices in Northeast Asia, the wave of indexation has been inexorable.

The implicit understanding in the coking coal market was that BHP, as the biggest producer of coking coal, would dedicate a portion of output to the spot market to support price discovery, whether via bilateral negotiations or on trading platforms.

This unspoken compact was broadly seen to have served the market well, as long as a steady stream of spot supply flowed and allowed daily supply-demand fundamentals to determine where prices were assessed and published, which when averaged, let buyers and sellers effectively do away with long-drawn price negotiations.

The stage was therefore set, with one of the key conditions in the evolution of any commodity market toward proper price risk management fulfilled. The other key condition is the growth of a corresponding paper market for market participants to hedge their price exposure or speculate on future price directions.

Today, the metallurgical coal market has made inroads in index-linked pricing but is yet to see the derivative market develop to a meaningful size for efficient hedging and speculation.

Market participants see the low liquidity in the derivative market as a barrier to entry, although a chicken-and-egg problem presents in that some cite the low liquidity as precisely the reason why they are not entering the paper market.

China held sway as top buyer

Before China's unofficial ban on Australian coal imports in October 2020, it was the biggest spot buyer of seaborne metallurgical coal.

Leaning on rich domestic coal resources, Chinese buyers often tapped imports of seaborne coals opportunistically, especially premium brands with high coke strength after reaction and low volatile matter that served the needs of the ever-growing sizes of their blast furnaces, especially in coastal regions.

Chinese buyers were often seen as price leaders by buyers in the rest of the world, and deals, bids and offers they were involved in informed Platts CFR China assessments. Often, but not automatically, such information also informed Platts assessments on an FOB Australia basis via a freight netback, when it was determined that China was the marginal buyer of coals traded on this incoterm.

Not everyone, however, was thrilled with the idea of the Chinese market setting prices for the rest of the Asia-Pacific and even as far afield as Europe, where buying practices differed drastically.

Steelmakers in these so-called traditional markets operate mostly older coke- and iron-making facilities that limit flexibility in coal blending, and so prefer to lock in nearly all their requirements via term contracts to ensure security of supply.

Following China's unofficial ban on Australian coal imports, two key changes occurred. The first was the decoupling of the relationship between FOB Australia and CFR China prices.

The spread between Platts Premium Low Vol Hard Coking Coal CFR China and FOB Australia prices in 2019 averaged at $9.31/mt, according to S&P Global calculations.

This was very close to the average of Platts dry bulk freight assessments for metallurgical coal for the East Coast Australia-Northern China route over the same year, at $9.45/mt, indicating how closely related prices on both locational bases are.

But from November 2020 onwards, the CFR-FOB spread has widened in both directions, surging to a high of $218/mt in October 2021 after major rains flooded coal mines in the key province of Shanxi, and then plunging to minus $245/mt in March 2022 after the EU threatened to sanction Russian coal.

The market has not been a stranger to this phenomenon, as seen when Cyclone Debbie hit in 2017, which saw FOB Australia prices surge far above CFR China price levels.

Plunge in spot liquidity

The second major change was the sharp drop in spot liquidity observed, as steelmakers in other major importing economies like Europe, India and other parts of Northeast Asia willingly took up the coal that the Chinese gave up, not surprisingly, mainly via term contracts.

Spot transactions for premium hard coking coals on a CFR China basis observed by Platts slumped to just 4.12 million mt in 2021 from 27.32 million mt the previous year, and dropped further to 0.73 million mt in 2022, data compiled by Platts showed.

As a percentage of total output by BHP Mitsubishi Alliance (BMA), the world's top producer, Platts-observed spot deals of premium hard coking coals were at 19% in 2020, slipped to 13% the following year and then tumbled to just 6% in 2022.

In the first three months of 2023, observed spot deals accounted for 6% of BMA's production, indicating little change in the trend of thinning spot liquidity.

BHP, which markets all the coal produced by the joint venture, did not respond to an e-mailed request for comment.

The increased allocation of material to term contracts compounded a situation of reduced spot availability in 2022, when planned EU sanctions on Russian coal, inclement weather in Queensland that curtailed output and COVID-19-related labor shortages drove spot prices to a record high of $670.50/mt FOB Australia in March.

Even though term contracts ensured security of supply, spot-linked pricing meant that any tightness in spot material reverberated and was magnified in the price of term contractual volumes.

Enter India

Steelmakers in India, having undergone consolidations and all executing ambitious capacity expansions, comprised a key market segment that actively boosted term contractual purchasing, mainly due to a lack of domestic resources.

Leapfrogging China as the top importer of seaborne coking coal last year and being agnostic to Western sanctions on Russian coal and PCI, Indian steelmakers have come into their own and are now playing a more active role in the spot market.

When converting coal to coke did not make economic sense, JSW Steel for example sought to sell coking coal via real-time transparent tenders published by Platts, following a similar move by ArcelorMittal.

Indian buyers have also moved beyond being buyers of mainly mid-tier hard coking coals to become active buyers of premium hard coking coals from Australia and even North America.

What has driven their new-found appetite has been a tectonic shift in seaborne coking coal trade flows that has seen attractively priced Russian mid-tier coals being redirected by the Russia-Ukraine war to willing buyers mainly in India and China.

From a benchmarking perspective, India's emerging activity in the spot market for premium low-vol hard coking coals may see it exert greater influence over corresponding price assessments for that grade of coal, especially as it competes head-to-head with Chinese mills as the marginal buyer of Australian coals.

The next part of the series examines more closely the shifts in these trade flows and their impact.