Singapore — China's National Development and Reform Commission in mid-November imposed further port restrictions on coking coal and thermal coal to last until the end of 2018 at ports across China. Evidently, this move resulted in a slowdown in buying activities as market participants needed assurance and clarity to buy confidently.
As ports reopened on January 1, 2019, market participants were aware that they needed to utilize their import quotas efficiently in light of unpredictable political moves by the Chinese government.
This may then have an impact on the differentials, or spreads, between each type of coking coal.
The spread between Chinese delivered Premium Low Vol (PLV) and Premium Mid Vol (PMV) has been growing steadily for the past three years.
In 2016, the spread averaged $2.75/mt - PLV coals enjoy a $2.75/mt premium over PMV coals. However, in 2018, the spread almost doubled to $4.97/mt.
Market sources attribute the increased differentials to China's policies for efficiency gain, requiring them to use high coke-strength-after-reaction types of coal to increase efficiency while fulfilling the requirements of Blue Skies policies.
With the import quota now under close scrutiny, market participants expect PLV to continually fetch a neat premium over PMV type of coals, which may see spreads between PLV and PMV widening in 2019.
However, the same cannot be said for the spread between tier one and tier two coking coal.
The spread between tier one and tier two coals has been relatively inconsistent due to the difference in market fundamentals across these two types of coal. However, it appears that the tight spread would stay supported as spot supply of tier two coals face tightness in light of Australia's railing situation.
With the Chinese import quota in place, market participants said this should have little bearing on the spreads. Instead, the interaction of demand and supply in the tier two coking coal market would likely determine the magnitude of spread.
The spread between each type of coking coal - across brands or segments - has proven dynamic as these react to market situations.
Spread volatility may provide opportunities, or not, for market participants across the value chain to capitalize on trends that are playing a role in the metallurgical coal market.