Mon, November 13, 2017 11:50 am
Dianna and John made their way to the MetCoke Summit, held in Chicago this year. With met prices where they are, it’s not a surprise the conference mood was optimistic and upbeat. Attendance was up roughly 12% vs last year. In addition to hearing some great presentations, we also attended dinners, met with industry contacts, checked in with clients and even toured a coke plant. Here are our key takeaways:
- Indian Met Demand: The sentiment around the event was that India is slated to be the next ‘China’ now that China is showing signs of slowing a bit. India’s steel production is within striking distance of 100 mm MT this year, a milestone that has been talked about for decades. The outlook for future Indian steel output is robust, with ambitious targets being thrown out there. Dr. John Quanci, the VP of Engineering and Technology at SunCoke presented a target of 240 mm MT by 2030 while Dr. Ahmed Firoz, Chief Economist at India’s Ministry of Steel, said the country would hit 270 mm MT by 2030-2031. According to Arun Kumar, India’s National Steel Policy 2017 calls for 300 mm MT of steelmaking capacity by 2030, with the majority using blast furnace processes. The country is pushing for India to become the preferred global manufacturing destination with its ‘Make in India’ program.
- Global Met Coal Supply: On the supply side in addition to capacity expansions and potential additional seaborne met production from incumbents Australia and Canada, three countries repeatedly came up during the conference: Mozambique, Indonesia and Russia (MIR), as having the potential to impact significantly the market over the next five years and beyond. MIR coals share in common high vitrinite and generally low sulfur and phosphorous contents but vary in terms of ash levels. While high vitrinite content is generally viewed favorably in coking coals, excessive vitrinite content can result in frothy furnace coke. Adoption of these coals by foreign coke plants introduces additional uncertainty about the degree to which U.S. coals will remain in blend designs. MIR coal market acceptance and utilization, however, is contingent upon fragile and in some cases, yet-to-be developed, inland transportation systems to move production to market.
- US Met Producers Shift Focus: ARCH made it clear during their Q3 earnings call on October 31 that their focus in 2018 would be away from annual, North American sales and towards quarterly, export sales. Last week we spoke with more than one US met producer who was taking the contrarian strategy and is looking to push more domestic sales and reduce shipments into the export market in an effort to lower price volatility. They believe domestic market opportunities abound and they can take advantage by increasing production at existing assets without significant additional capital.
- Met Coal Pricing: Edwin Yeo, Senior Managing Editor at Platts in Singapore gave a very informative, albeit speedy presentation. He shared that in the first ten months this year, premium hard coking coal comprised about 41% of Asia-Pacific spot trade by volume, followed by hard coking coal (24%), PCI (20%), semi-soft (8%) and semi-hard (6%). China represents about 70 – 75% of spot/index buying activity, meaning met indexes are significantly driven by China and supply side events. China’s goal of achieving the ‘Unholy Trinity’ of stable prices, reducing domestic coal production and lowering import volumes is unrealistic and recent events are evidence. Key indicators of Chinese buying behavior include: 1) Price arbitrage; 2) Supply disruptions; and 3) Regulation. Regarding his third point about regulation and policy in China, Yeo opined that it is “irrational, crazy, random and arbitrary.” And while coking coal indexes and swaps allow for some hedging opportunities, the market is young and the volume is still quite small compared to the physical market it’s designed to be a reflection of. Ted O’Brien of Xcoal said the market needs a few more years to develop, comparable to iron ore which took 5-6 years to gain traction.
- Capital Spending: Capital spending has been reined in and new coke capacity would call for $300 – $400 mm and a two-year lead time. With capital investment programs at multi-year lows, we’re poised for market tightness in the near and medium term.
- China Slowing: Not only has China been cutting steel capacity, which is well publicized, but in addition coke times have slowed from 21 hours previously, to 36 hours and now 48 hours. In addition, steel exports are down in 2017, from both 2016 and 2015.
- US Met M&A: Though consolidation would be positive for the industry and pricing, the market currently lacks an active consolidator, according to Ted O’Brien, Manager of Capital Markets & Marketing at Xcoal. Small producers, which make up roughly 20 – 25% of US met coal, are typically tightly held by one leader who is very actively involved in the day-to-day operations of their company. It is unlikely that between two small companies like this, one leader would agree to take a step back.
- Met Buyers Panel: In one of the more interactive sessions, met coal buyers shared the challenges they face, with all in agreement that flexibility is the most major one today. One shared they are moving more towards private, longwall operators that can provide security, rather than public coalcos that chase prices in the export market. Another shared that while coal producers do a great job of mining, logistics is their biggest challenge and running leaner creates fragility in the supply chain. All three agreed China is a black box that is impossible to analyze, but has the biggest impact.
- Blend Testing: Market participants are anxious for the lab purchased by Hampton Roads Testing to return to operations. It has been down for over a year and without many test coke ovens in the US, it has been difficult to test new blends. A representative from Teck Resources said they are looking at starting their own.
- Arcelor’s Burns Harbor: Dianna and John had the opportunity to tour ArcelorMittal’s Burns Harbor coke plant, located in Burns Harbor, Indiana, where they witnessed charging the ovens, a coke push and quenching. The plant consists of two 6-meter batteries with 82 ovens each, built in 1969 and 1972 and rebuilt in 1983 and 1994, respectively.
- Production: Together, the batteries consume 2.7 mm tons of coking coal per year and produce approx. 1.7 mm tons of furnace coke, along with 92K tons of nut coke and 93K tons of breeze coke. The furnace coke is sent directly to the nearby Burns Harbor blast furnace via conveyor. In addition, the plant also trucks excess coke to Arcelor’s Indiana Harbor blast furnaces—which now represents approx. 10% of their annual coke output.
- Coking Cycle: All ovens are currently in service and the plant is running at 100%. The ovens are operated on an 18-hour coking cycle at around 2400° Fahrenheit.
- Coal Supply: Burns Harbor uses up to six different types of coal in their blend. Upon further digging, we learned they are currently using some Capp high vol A and B, a Capp mid vol and a Canadian mid vol, as well as low vol from their own Princeton mine. They target keeping about 27 days of inventory on hand (roughly 180K dry tons). Nearly all coal arrives via rail. The coals are crushed individually before blending by electronic weighfeeders on each silo.
- Transportation: The plant is dual-served by the CSX and NS, but will also truck materials in/out if needed and has capability for vessel delivery. A rotary car dumper unloads 75 railcars per day, which translates to normal capacity of about 21 unit trains per month (2,300 railcars per month).
- By Products: Plant by-products include coal tar, ammonium sulfate and coke oven gas.