SMM Analysis: Coke Futures Plummeted, but the Spot Fundamentals Remained Strong

SHANGHAI, Nov 1 (SMM) - On the supply side, the regional supply of coke has decreased, and the production limit in Shandong remained at 70%-80%. While the supply was still low in Hebei due to environmental protection inspections.

On the demand side, part of the steel mills in Henan and Jiangsu were further restricted from producing under power rationing; the production of steel mills in Linfen, Shanxi was restricted in certain time periods to certain extent; the steel mills in Hebei were required to conduct staggered production for the upcoming Winter Olympics, plus the environmental protection requirements. The demand for coke dropped significantly.

On the raw material end, coal output has increased due to the supply guarantee policy. In addition, thermal coal has been under policy control recently, and the prices have been lowered, so were the prices of some coking coal. And the market has become more anxious. However, the coal output in Shanxi is mainly for power generation. The supply of coking coal is still tight, supporting its prices. On the whole, the supply and demand of coke are in a tight balance, as the supply of coking companies only reduced slightly and the steel mills’ demand for coke was moderate. However, the coke demand is likely to shrink further amid falling profit margins of steel mills as the steel prices have been dropping greatly. Therefore, the long-term prices are likely to weaken after stabilising in the short term.

In summary: The steel mills have been more inclined to hold the prices firm as the current round of slump has pushed down the steel prices to the breakeven point of steel mills in some areas. For coal futures, the recent plummet has largely mitigated the price hike risks since July, and the ferrous futures prices are likely to run steadily this week with quickly narrowing declines. In the medium to long term, the spot prices of coal will usher in a delayed decline, while the fundamentals of steel will not change much. It is expected that the steel prices will rebound and recover the previous losses after relative news subsides.