SunSirs: Coking Coal Outperforms Steel Products amid Sustained Supply Constraints

Tight domestic supply coupled with short-term import disruptions continues to support the supply side of coking coal.

The aftermath of the high-pressure safety supervision triggered by coal mine accidents is still lingering. The supply of coking coal has contracted, which forms the core support for its price. In addition, the new EU steel import regulations officially took effect in July, narrowing the export space and increasing the pressure of goods returning. The pattern of coking coal being strong and steel being weak will continue.

According to the analysis, the city-wide grid-based inspection in Shanxi has continued to this day. Data from Steel Union shows that a total of 171 coal mines in Shanxi have suspended production, involving a production capacity of 230.6 million tons. As of July 8th, only 98 mines have resumed production, while 73 coal mines with a production capacity of 95.65 million tons are still in a suspended state, with no signs of accelerated resumption of production. Up to now, only one coal mine in Qinyuan has resumed production, and the rest are waiting for acceptance. More importantly, the resumption of production at coal mines has not led to an increase in output. The output of most resumed coal mines is only 30% to 70% of the previous level. The output of coking coal in Shanxi is expected to remain at a low level for a long time, and there is a shortage of high-quality main coking coal.

Offsetting the positive supply-side factors are the negative trade impacts brought by the EU's new steel import regulations, which were officially implemented in July. The new rules strictly control imports through high tariffs and an origin traceability mechanism. Since the implementation of the new regulations, China's exports of steel and coke to the EU have contracted significantly, leading to a return of domestic supply sources. Coupled with weak domestic demand in the traditional off-season, the market has faced a phase of excess supply. Steel mill profits have come under pressure, prompting a reduction in molten iron output, which in turn has caused iron ore prices to weaken. The decline in coke exports has limited the room for price hikes, preventing coke prices from rising in tandem with coking coal prices.

On the macro front, the June macro data shows that liquidity remains reasonably abundant, but social financing and credit growth are weak, and there are still obstacles in the transmission from loose monetary policy to loose credit. The medium - and long-term financing demand of enterprises is poor, and their willingness to expand production is insufficient; residents are deleveraging, with consumer loans and mortgage loans in a state of net repayment, and their willingness to increase leverage is not strong. Domestic demand needs to be further released, and the terminal demand for black products lacks drivers from the macro side. Subsequent policies will still focus on targeted bottom - line support and unblocking the financing channels of the real economy, with limited direct driving effect on the demand for industrial products.

On the supply side, the analysis is mainly conducted from two aspects: domestic production and imports. In terms of domestic production, the operating rate of coal mines remains at a low level. As of July 10, the operating rate of coal mines sampled by the China Steel Association dropped to 66.11%, a decrease of 3.51 percentage points month-on-month, and the supply in producing areas continues to be tight. Regarding imports, the Erlianhaote Port closed for 5 days from July 11 to 15 due to Mongolia's Naadam Festival. Although this is a regular holiday control, the short-term suspension of customs clearance has led to a contraction in imports. Terminals are pressing for lower prices and mainly purchasing on demand, resulting in weak transactions of high-priced resources. Overall, with the tight domestic supply and short-term import disturbances, the supply side of coking coal still holds support.

On the demand side, molten iron output is at a high level within the year, and coking coal demand is relatively rigid, but signs of marginal weakening have emerged. Under the Steel Union's statistics, as of July 10, the molten iron output of sample steel mills was 2.4127 million tons, a week-on-week decline, and the production reduction by steel mills in the off-season is gradually being fulfilled. Terminal real estate construction and infrastructure construction are constrained by high temperature, rainy weather and capital shortages, resulting in steel demand falling short of expectations, steel product profits under pressure, and steel mills lacking the willingness to increase production. Coking plant operating rates remain high, and coke shipments are smooth, but the room for price increases of coke is limited due to steel mills' efforts to reduce raw material costs.

Overall, the price of coking coal as a raw material is relatively strong due to supply constraints, while the room for price hikes of coke is limited due to steel mills' efforts to reduce raw material costs. Finished steel products perform weakly under the dual pressures of sluggish terminal demand and blocked exports. The differentiated pattern of strong coal and weak steel will continue, but both the upward and downward drivers are insufficient. The short-term market will be dominated by volatility, with the raw material side relatively resistant to declines and the finished product side under obvious pressure.

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