China's coking coal prices are expected to reach intra-year lows in the fourth quarter, given strong supplies amid limited disruptions and a seasonal downturn in end-user demand, said an industry analyst at a market summit this week.

Coking coal prices had dropped steeply since late July 2024, falling below the 2023 lows, Liu Yanjun, manager of the index department in Fenwei Digital Information Technology Co., Ltd., said at the coal market summit held in Nanning, southwestern China's Guangxi province.

Current coal prices are near the upper range of fluctuations seen between 2016 and 2020. After hitting the lowest in late March, prices rebounded by 300-400 yuan/t in April, and hovered within a narrow range in May-June, Liu said.

Raw coking coal output at Fenwei-surveyed mines under 88 enterprises has recovered to 9-9.1 million tonnes per week as of now, against 9.2-9.3 million tonnes per week last year and 2% lower than last year's peak. In 2024, production is predicted to start at low levels and trend higher later on.

In the major producing base of Shanxi province, coking coal output observed a notable recovery in the third quarter after year-on-year slumps in the previous two quarters.

Over January-July, Shanxi's raw coking coal output averaged 54.33 million tonnes each month. To meet the 1.3-billion-tonne annual target, Shanxi needs to maintain an average monthly output of around 64 million tonnes from August to December, which indicates a significant challenge.

Based on Fenwei's monitoring data, Shanxi's average monthly raw coking coal production in the fourth quarter is expected to reach 61-62 million tonnes, slightly higher than the third quarter.

Due to weak demand and increased supply overseas, 2024 remains a strong year for imports in China, with a significant rise in low-sulfur primary coking coal intakes. China imported 34.58 million tonnes of Mongolian coal in the first seven months, accounting for 50.68% of the total. Imports of Australian coal totaled 4 million tonnes in the same period, surging 237% on the year.

The domestic supply is projected to sustain a high level in the fourth quarter amid limited supply disruption factors, while imports may see a slight decline due to cost and port storage issues.

On the demand side, China's pig iron production capacity stands at 979 million tonnes per annum (Mtpa), translating to coke consumption of 441 million tonnes. Coke capacity is nearly 580 Mtpa, with the 2023 production at 450 million tonnes (incl. semi-soft coke and foundry coke), indicating an excess of production capacity.

Against this backdrop, continuous reduction in capacity utilization is required to align with the current low molten iron production, leading to a noticeable decrease in demand for coking coal.

Overcapacity inevitably results in low profits; thus, the coking industry is expected to maintain low margins over the next few years, causing the gradual elimination of some companies with long-term poor cash flow.

Coke-making capacity is expected to see a net addition of 12.37 Mtpa this year. So far, 15.9 Mtpa of capacity have been added and 3.4 Mtpa eliminated, leading to a net increase of 12.5 Mtpa. Considering capacity utilization and industry profit conditions, the overall change in coking coal demand remains uncertain, but demand for backbone coal is projected to rise further.

Fenwei assessed that the capacity replacement in 2024 has led to an increase of 3.5 million tonnes in washed backbone coal demand as of now.

In the fourth quarter, coke-making capacity is anticipated to be range-bound, with increments roughly equal to eliminations. Due to a sluggish market and poor cash flows for companies, the capacity phase-out is likely to exceed increment, suggesting a probable downward trend in coking coal demand.

Molten iron output reduction is estimated at 35 million tonnes in 2024, with a corresponding decrease in coking coal consumption of approximately 37 million tonnes.

During October-December, molten iron production is expected to fall 2.6% quarter on quarter, leading to a reduction in raw coking coal consumption of around 6 million tonnes or a daily reduction of 66,000 tonnes.

Mine-mouth coal stocks continued to accumulate over May-August, with a prolonged accumulation period. In September, mine-mouth stocks experienced a modest decline due to speculative purchases by traders and washing plants, as well as seasonal restocking by downstream users.

Nevertheless, portside coking coal inventories stayed high due to robust imports of both Mongolian and seaborne coal and weak demand. Escalated stockpiles of high-cost imported coal at border ports and coastal ports led to considerable selling pressure.

Prices at border ports and coastal ports are likely to be further impacted by the arrival of low-cost seaborne coal and the continued decline in the fourth quarter's Mongolian mine-mouth prices of long-term contract coal.

In the downstream sector, users kept coal inventories consistently at new lows owing to lukewarm demand, maintaining a long-term low inventory strategy.

Winter restocking among those end buyers is likely to weaken in the final quarter, with a greater focus on need-to purchases. Overall, the inventory levels before the end of the year are expected to be lower than the year-ago levels.