Why strong carbon but soft coke?

China’s petroleum coke market unexpectedly became weak in the last couple of weeks, led by the teapots refineries.  As the chart shows, the monthly price from independent refineries started to weaken during April and May, and tumbled down at the start of June. Meanwhile prices at the big SOE refineries remained stable.The change in teapot refineries’ prices coincided with scheduled maintenance at several refineries.

Teapot refineries constantly expanded in recent years, mainly in Shandong area.  Their market share reached over 30 per cent. Teapot refineries operate slightly differently in the market.   They publish their coke price changes to the broad market immediately, whereas the SOE’s only notify their larger clients of price changes for their coke.  Because of their size in the market place recently, this lends some volatility to the market.

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The chart below describes the monthly change of calcined coke and anode prices. CPC output has decreased in the three months since February, climbing slightly in May. Meanwhile, anode output also fluctuated or declined in recent months.  There is no doubt that the environmental inspections halted some production.  In fact, the stringent controls around Shandong, Hebei and Henan provinces never weakened during the first half of 2017, culminating with more restrictions for the OBOR conference recently.  And this is the essential reason to push down coke price. The relationship between coke and downstream carbon has evolved into oversupply.

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We mentioned in latest weekly report, Weiqiao and Inner Mongolia Jinlian aluminium conceded another increase to the purchasing price of anode in June, and the condition of Inner Mongolia is bad. In order to obtain sufficient goods to ensure the operation, they increased by RMB300-350/t. On supply, factories in Henan and Shandong had to restart slowly but in Hebei, total output kept stable with the previous month. Current anode production cannot keep up with demand right now.

In fact, what we are seeing is a function of the different cycle times for the three products.   We think the market will become clearer as we pass through June, and the strong demand at the anode level will soon move upstream to coke.  But if you really want to understand what’s happening, contact us about subscribing to our weekly and monthly reports.

Petcoke – can’t live without it

During the tough reforming period in China, petroleum coke, or petcoke has suffered much, with calcining plants being ordered to cut capacity or close completely. But if you talk about aluminum, you must acknowledge that petcoke is important now and in future.The process for making aluminum has not changed in decades, so if demand for aluminum is going to grow, petcoke demand will also grow. Let’s have a look what petcoke is going through.

As one inconspicuous by-product of crude oil, petcoke is mostly sold as a fuel, especially in times when coal prices are high.  While taking into account the typical character of petcoke as a polluting material, its usage is quite limited. The illustration below explained the pressures on coke during recent years.

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The important factor I want to show is the antagonistic relation between policy, economy and market demand. Last year, China imported plenty crude oil, becoming to the largest importing country around the world.  Processing volumes also increased 3% y/y. However, the quality declined apparently. Although petcoke production has risen so far this year,  anode grade output has not, and this is directly because of the crude oils that China is importing.  Unlike other commodities, users of petcoke have almost no influence on the quality that comes out of the oil refinery.  How can users influence the quality of the product offered to them?   In addition, with aluminum expanding, how do smelters get enough petcoke, even regardless of the quality?

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This chart above showed monthly coke production for five years. For January of 2017, output is at historical high levels, however, downstream carbon factories always complained the lack of moderate coke even though they are suffering intermittent shut down with the severe pressure of environmental inspection. So where is the petcoke going?

If you are our subscriber of BCR report, you should be familiar with the following picture.

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Based on IAI statistics, China’s production of aluminum reached 2,950kt in February. In theory, anode grade coke demand is therefore 1.6Mt, an increase of 19% y/y. Actual output of coke rose by only 3%. Ignore all factors such as policy and economy, it is only about conservation of energy. If aluminium industry will boost constantly in future, we should give more attention to petcoke and all raw material.

All the data I presented here is in the standard reports we publish.  If you want to understand more about petcoke and other products, please contact us. 

Weifang closures – more to it than meets the eye

Some clients have reported receiving an English translation of a document issued by the Weifang local government, announcing closures of calcining plants until March 31.

The document is real and the orders to close are authentic.  But there’s more to the document than what some might realize.

The Weifang local government has ordered several industries to close capacity, with the document citing insufficient progress in the fight against air pollution.   The ruling orders carbon plants and carbon black plants to close down completely, while other industries have to close between 30% and 50% of their operations.

The reason for this rush to close factories is because the environmental inspection teams are in the area.   As we have reported to our clients previously, the Ministry of Environmental Protection has moved to strengthen the weakest part of the efforts to fight pollution – the local governments themselves.   Since the MEP criticized local governments for their lack of progress, the response has been to act or even over-react.  As we reported earlier today, a local government in Henan province did the identical thing – close factories for the duration of the team’s visit.

That’s what makes this recent move troubling.  Weifang local government has taken these factories out for 3 weeks, as some sort of temporary reaction to appease the Beijing authorities, though it makes negligible difference to pollution.   And there’s every likelihood that other counties will do the same as Weifang and Linfeng – random closures to impress the inspection teams.

When one talks about carbon plants in Weifang, one immediately thinks of two major exporters.   We understand that the order has caused both companies to shut at least some capacity.  We will provide our subscribers with more detailed information about exactly what is happening.

We also understand that there have already been at least 2 shipment defaults in recent times and there may have been a third, but we are still confirming.

The action to close carbon black plants is also a concern for those involved in coal tar pitch.  We are still investigating this part of the ruling, and the implications for customers.

Our clients and subscribers are invited to contact us to discuss these developments, as there is an amount of information available that we cannot put into print.   enquiries@az-china.com.

Anodes – where will the pain be felt?

Do you still remember what had happened in the carbon industry last year?

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China’s carbon industry  has been in a state of limited production since the middle of last year, at the same time as smelters were adding capacity. The resulting short supply caused prices to leap.

Yet the operating rates in the industry have not been all that bad.  Take anodes for instance. The average operating rate was not very low at 76%. In Yunnan and some other regions, factories were running at full capacity during last year. Besides this, the operating rate of other province mainly fluctuated up and down at the average level.

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Note: Others refer to Jiangsu, Guizhou and Sha’anxi province.

However, compared to the smelters expanding, how did the supply side meet the increasing demand? In 2016, China totally produced 18Mt anode, with an additional 1Mt exported to overseas markets. But during the whole past year, China produced 32.8Mt aluminium based on our statistics. Hence in theory, consumption volumes of anode in homeland is 16.4Mt, accounting for 90% of the market. Did the carbon market oversupply? No, it truly not in last year.

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The final interesting thing we find is the chart above.  It shows in terms of province, aluminium production and anode supply rate (=anode production/theoretical consumption -1).

We can roughly divide all smelters into four regions, East (Shandong and Henan), Northwest (Xinjiang and Inner Mongolia), Central (Qinghai and Guizhou) and South (Yunnan).

As the chart shows, apparently the top four provinces have accounted 66% of the market, involving Shandong, Xinjiang, Henan and Inner Mongolia. But in  Shandong and Henan, the supply rate still presented positive.  It means carbon capacity in both regions is sufficient to meet local smelters’ demand. However, as the second biggest aluminium output base,Xinjiang and Mongolia are short anode supply.

In light of the recent news of cuts of up to 50% of carbon capacity in Shandong and Henan next winter, the question is will distance become an enemy of the remote smelters in the northwest?   If supply dives in Shandong province, lower transport costs will allow local smelters pay more for their anodes than their competitors in the northwest.

The issue becomes even more complicated next winter.  Not only might smelters in Xinjiang and Inner Mongolia struggle to get anodes, but some experts are already predicting that shipments of metal from these areas to the markets in the east will be disrupted next winter.  This disruption will come from a shift to coal transport from these same regions.  We already saw this to a small extent this winter, but will restrictions on coal in the eastern and central regions, Xinjiang and Inner Mongolia will have increased incentive to sell more coal to the east.  That will bump primary metal out of the rail wagons.

AZ China will continue to trace capacity change in both regions, and will report our findings to our clients and subscribers.

Thanks to World Aluminum Organisation for the feature image.

New air pollution regulations and carbon

Further to our post of about an hour ago, I just wanted to highlight one specific dot point in the new regulations about carbon companies.

According to the new regulation, carbon companies who do NOT meet the standards will be ordered to close.  Fair enough, but here’s the rub – carbon companies who DO meet the standards will be ordered to close up to 50% of their capacity.

Yes, they will be penalized even though they are meeting the emissions standards.

This limitation will apply during the “heating season”, beginning mid November 2017, and running through to mid March 2018.  In fact, carbon companies that we spoke to this morning reported that they were already under some similar restrictions this winter, and were keen to get the next 15 days out of the way.  The heating season closes when central heating is turned off, March 15.

It’s still too early to say what the full impacts will be.   Several of our usual contacts are presently in San Diego for TMS, and couldn’t be reached.  But the impact will be driven primarily by the extent to which smelters are also penalized.  If they have to reduce by 30%, then the impact will be reduced.  But either way, exports of carbon products could be at risk.

 

TMS Live Blog – Let Trumpism prevail

As most of you know, every year folks from around the world descend on the annual TMS convention to discuss the latest developments in petcoke, calcined coke and other raw materials.   This year TMS is being held in San Diego.   And each year, I run a live blog, describing the atmosphere and the latest gossip from around the corridors and coffee shops and bars.

As many of you also know, this year I have been banned from entering the US, because I went to Iran in 2014.   Even though I have an Australian Passport, and Australians are allowed to enter the US using a Visa Waiver, my visa waiver has expired, and the US declined to give me a new one.  Efforts to get a visa from the US embassy failed.

So here I am, reporting on TMS from a Starbucks coffee shop in Thailand.   But I reckon, if the President of the USA can lie to his people and accuse the media who point out his lies as being fake media peddling fake news, then I have a perfect right to report the latest gossip free from any annoying details called facts.

So here goes.

TMS always starts a few days early, with an industry conference on petcoke and calcined coke.  I can report there are at least 30 people at the conference, and at least one or two papers were given from people who do NOT work for the organizers.   As in other years, there were many papers on cement and the power industry, but the audience really wanted to know more about China.  The papers covering China proved to be the most important and generated the most questions.

Meantime, a survey of the crowd around the corridors and in the meeting rooms brought one important point into focus.   TMS is no longer the drawcard it used to be, and that is best illustrated by the fact that one of the most important companies in the aluminum and raw materials space declined to send anyone to this year’s TMS.  This is the same company that used to have 20-30 people attend.  I recall presenting to them in San Diego in 2011.  There were 26 people in the room, not including my team.  But since this anonymous company split with its downstream business, management has taken a tougher approach to all cost items, including TMS.

TMS is not TMS without the regulars.   In the lobbies of the main hotels at the top of each hour, groups of Chinese traders mingle with prospects, while old timers hail each other and comment about how it doesn’t seem like a year since the last TMS.

And then there’s the supplier party coming up on Monday night.   Even though the event hasn’t even happened yet, I can report that Howie put on a majestic performance with the steel guitar, while Scott led the singing with his electric castanets.  Who knew that Mariachi music could be so much fun?  But there were some in the audience who seemed more interested in talking business instead of getting into the mood of the evening.

Anyone who disputes the facts in this report, I refer you to Kellyanne Conway, who can explain to you the definition of alternate facts.

A Happy TMS everyone.