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FEATURE: East China coke output rein-in stirs supply worry

With the COVID-19 seemingly under control, air pollution control – the core task for Beijing’s “Blue Sky Safeguard” over 2018-2020 – has returned to the Chinese authorities’ radar, and coking, a top polluting industrial sector, has been requested by the authorities in Shandong and Jiangsu in East China, to continue with restricting or removing local capacities, and this has renewed the market concern over coke supply, as the measures are expected to sharply reduce regional coke availability.

Latest control to trim East China’s coke supply

To reduce the heavy reliance on coal in power generation, the Shandong provincial government announced in late May to cap its local coal output within 32 million tonnes for the whole 2020, which is calculated to a 35% cut from last year’s actual output. Prior to this latest move, the province had already removed about 16 million tonnes/year of effective coking capacity over early 2019 to April.

The latest announcement has propelled some coking plants in Shandong to double their coking time because of the coal supply constraint, according to Mysteel’s survey.

In parallel, Xuzhou in Jiangsu also announced to chop off 6.8 million t/y of coking capacity in the first half of 2020 among which 5.5 million t/y was operative. Xuzhou is with the largest independent coking capacity in the province, thus being the crucial merchant coke supply to the local steel mills. However, by June 18, those plants in the list of closure, though, had been in operation, and none had been specified of a closure date, Mysteel understands.

By the end of May, all the clamp-down efforts saw Shandong’s coke output plunged 21.6% on year to about 15 million tonnes, and that from Jiangsu fell at the same pace of 20% on year to 5 million tonnes, far more substantial than the 2.8% on-year dip in the country’s coke output to about 188 million tonnes, according to the NBS data.

The decline in coke output has been magnified too especially when the capacity utilization rate of China’s 230 independent coking plants averaged 74.7%by June 18, or 2.3 percentage points lower on year, while the blast furnace capacity utilization rate among China’s 247 Chinese steel mills, the top coke consumers, surged to probably an all-time high of 92.7%, or 2.6 percentage points higher on year, according to Mysteel’s data.

Table: Coke production

Province

Jan-May (million t)

Y-o-Y (%)

Shandong

15

-21.6

Jiangsu

5

-20

Total

188

-2.8

Source: NBS

Lower coke supplies force steel mills to look for alternatives

“We have been feeling clearly local coke supply shortage, so we have had to source more from other provinces, raising our coal procurement cost,” said an official from a large-sized steel mill in Shandong, clarifying, though, that they have not reduced coke consumption in steelmaking yet, nor their steel output has been affected by this.

A Shanghai-based market watcher noted that it has remained unclear whether Shandong will stick to the coke output control for the rest of the year, and output for this week seems to have grown,” he said on June 19, confirming, though, that “Shandong steel mills have reached out to coking plants in Shanxi, Hebei, and Henan for supplies, but it is not easy to establish a solid coke supply chain within a short period”.

Some Shandong steel mills have even looked beyond China, seeking overseas coke supplies to fend off the domestic supply tightness.

“We’ve added imported coke after the Chinese New Year (in early February), which is good in quality and more affordable, and rising domestic coke prices are adding our advantages,”disclosed an official from a second Shandong steel mill. The company, without its affiliated coking plant, has been buying coke from Asia, Europe and even South America for its steel production, he added.

Different from the Shandong steelmakers, those in Jiangsu, however, seem more prepared for Xuzhou’s coking capacity trim, as “Xuzhou’s de-capacity plan was announced over a year ago, giving the Jiangsu steelmakers enough time to find replacement, while steel mills in Shandong had been caught off guard with such as harsh and swift cut,” a Shanghai-based analyst compared.

Less coke raises prices and coking coal plant operations

Coke supply shrinkage from East China has encouraged coking plants to raise their offering prices of merchant coke at all major regional markets in China four times since late May, and as of June 18, the country’s national composite coke price climbed up to a four-month high of Yuan 1,870.2/tonne ($263.8/t) including the 13% VAT, or up Yuan 181.7/t on month, according to Mysteel’s assessment.

Higher coke prices saw the average margin among China’s 30 independent coking plants rose to its six-month high of Yuan 310/t on June 18, or up Yuan 175.4/t on month, and that for the quasi-first grade coke in Shandong was even higher at Yuan 370.4/t, or up Yuan 158.5/t on month, Mysteel’s assessment showed.

Chart: Mysteel’s composite coke price (yellow curve) and coke margin (red curve)

Source: Mysteel

Higher coke prices and margins, have, therefore, spurred the demand for coking coal domestically, leading to resumption of operations among the domestic coking coal plants with coking coal price bottoming out, according to market sources.

“Our coal sales have been rather steady, and so far even demand from long-term customers in Shandong has been good,” said an official with a coking coal mining group in Shanxi.

Over May 19-June 16, the operational rate among China’s 110 affiliated and independent coking coal wash plants gained markedly by 5.6 percentage points to 81.3%, though their processed coking coal output still dropped by 560,300 tonnes or nearly 20%to 2.3 million tonnes over the same period, according to Mysteel’s survey.

By June 18, Mysteel’s composite coking coal price climbed out of the record low of Yuan 1,019.6/t, up Yuan 3.9/t on month to Yuan 1,023.5/t including the 13% VAT, Mysteel’s assessment showed.


Written by Sean Xie, xiepy@mysteel.com, Olivia Zhang, zhangwd@mysteel.com

Edited by Hongmei Li, li.hongmei@mysteel.com