Recent weakness in the seaborne thermal coal market has eroded petroleum coke's (petcoke) cost advantage for Asia-Pacific buyers, potentially creating a fuel-switching opportunity for some cement producers as economies in the region begin to recover from Covid-19.
Petcoke prices have resisted declines in the rest of the energy complex, eroding the fuel's typical discount.
The India 6.5pc sulphur cfr petcoke price as a percentage of delivered South African high-grade and NAR 5,500 kcal/kg coal costs — after adjusting for heat content, taxes and inland transportation costs — has exceeded 100pc since 17 April. And it is at least 86pc of delivered costs for most other origins of thermal coal, including high-grade and off-spec Indonesian, Australian, Colombian and Illinois Basin material with less than 3pc sulphur (see graph).
Petcoke maintained a wide discount to all coal origins between October 2019 and January this year, encouraging many Indian cement buyers — the country's largest petcoke consumers — to use more of the fuel in their mix. India's receipts rose by 480,000t on the year to 2.3mn t in November-January, partly also because of unusually low imports in late 2018 amid regulatory uncertainty, but fell in February-March.
Indian firms typically seek at least a 10-20pc discount to high-grade coal prices to before increasing petcoke burn, although narrower discounts of around 5pc are tolerated for lower grades, such as Indonesian GAR 4,800 kcal/kg coal. But petcoke's recent loss of competitiveness may switch users' attention to coal, as Indian economic activity starts recovering from the impact of coronavirus. Many Indian cement plants have high flexibility to switch fuels and can quickly respond to changes in market conditions.
Subdued demand caused by the pandemic pushed South African high-calorific value coal prices to 14-year lows last week. Prices for various Indonesian grades also fell to multiple-year lows.
Demand in India, which took almost 60pc of South African exports in 2019, has collapsed since a national lockdown came into force in late March. The coal sector is exempt from restrictions, as coal is a key fuel for power generation, but a halt in key consuming sectors such as cement and sponge iron production has softened demand. Chinese demand also remains weak as the country's recovery from Covid-19 turned out to be slower than previously expected, and because of high domestic coal stockpiles.
Supply and demand
The seaborne coal market is oversupplied by around 40mn t, and a demand-supply imbalance could persist for much of this year, a Hong Kong-based analyst said on 22 April.
But for petcoke, output cuts seem to have exceeded the impact of weaker demand, at least in the short term. While delivered prices have fallen for many destinations compared with pre-pandemic levels, the decrease has been broadly limited to the drop in freight rates (see graph). The fob coke market for 6.5pc sulphur material firmed for the second consecutive week in the seven days to 22 April, supported by tight spot supply. Emerging demand in China, Japan, Pakistan, Turkey, central and Latin America added support to prices last week.
The 6.5pc China cfr coke market as a percentage of the south China-delivered NAR 5,500 kcal/kg coal import cost, after adjusting for heat content, rose to 90pc on 24 April from 79-85pc in recent weeks, but was below the 97-101pc seen for most of March when most regions still had some form of lockdown restrictions in place. China-delivered coke prices have fallen significantly since India entered lockdown, with a number of Chinese buyers having bought cargoes from Indian firms now unable to handle them because of halted operations and force majeure declarations at many ports. Lower prices combined with China's removal of retaliatory import tariffs on US coke are encouraging buying interest, although the country's recovery is still slow.
Elsewhere in Asia, Japan's largest demand for seaborne coke is coming from the power sector, as coke-fired utilities are not equipped to burn coal but would need to switch to fuel oil, which is currently more expensive.
Some Turkish cement firms are thought to have less fuel-switching flexibility, and production and domestic sales of cement have held just slightly below pre-pandemic levels — as the government imposed only a partial lockdown — resulting in firm demand for seaborne coke. But there are concerns about further cement production cuts in the country in May, partly because some export orders have declined amid slower construction activity in Turkey's key export destinations. May also represents the largest part of Ramadan, which started on 23 April, and when economic activity slows.
Spanish cement plants resumed operations in mid-April, and have reportedly faced sales drops of 20-30pc, although this is much lower than the previously expected 50pc or more. Spanish plants secure coke from domestic refineries, and have no direct impact on the seaborne market, but a stonger-than-expected picture in the first days of its recovery is promising for the industry in other countries.
Demand for seaborne coke has also been solid in Latin and central America, with cement output down by only around 30pc in key markets such as Mexico and Brazil.
But demand is still muted in India, the world's largest coke consumer, despite a partial restart of operations at major cement firms this week, as most companies were well-stocked before the country went into isolation in late March, and all cargoes for April were deferred to May. There are also worries that domestic demand may not pick up for at least a few more weeks, if not months. One plant halted operations just one day after restarting, because of a lack of stocking capacity.
Price pressure
Petcoke prices could face more pressure if global demand wanes further — as more countries introduce or extend restrictions to limit the spread of Covid-19 — or if key consuming industries such as cement, steel and power plants start switching to coal.
India's recovery will be key to how petcoke markets perform for the remainder of this quarter. But cement makers may have less appetite for the fuel if coal continues to be priced more competitively.
That said, any further downside potential for coal may be limited, as prices have fallen below production costs for many miners, who may opt to cut production. Anglo American has reduced its export thermal coal output forecast by 15pc to 22mn t for 2020. And Indonesia's Geo Energy plans to cut output at its two main mining subsidiaries following recent steep declines in coal prices.
