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High-sulphur coke set for rough 2016

High-sulphur petroleum coke prices slumped in 2015 as growing global supply met a widespread commodities downturn and increasing environmental concerns in China.

The landscape looks much the same for 2016, but it could be even more bearish for high-sulphur sellers as China looks set to codify its low-sulphur ambitions and a change in US law may tilt production toward greater volumes of high-sulphur coke.

Chinese demand never got off the ground in 2015 as a weak macroeconomic environment and concerns over potential emissions restrictions prefaced a third-quarter announcement of upcoming quality limits on coke.

The weak demand from China solidified India's role as the main market for high-sulphur coke this year. But India's greater role was more by default than because of strong demand. India's cement plants have been operating at low capacity all year, and expected government infrastructure plans that were forecast to jump-start demand have failed to materialize.

The main driver of India's push to import more coke, the coke gasifier project at Reliance Industries' Jamnagar refinery, did not begin in the third quarter as originally planned. It is now unlikely to begin starting up until after mid-2016.

Furthermore, new supply from two greenfield refineries in Saudi Arabia hit the market in 2015, injecting a few million more tonnes of high-sulphur coke. India is one of the few locations where buyers are willing to accept the higher sulphur content of the Saudi coke, which can reach more than 8pc.

All the while, coal prices fell steadily, which reduced coke demand and gave buyers more negotiating leverage.

Despite all of these factors, prices for US Gulf 6.5pc sulphur coke held mostly steady throughout the first half of this year, as tight supply and a large fall in freight rates gave sellers room to support pricing.

But by summer, sellers had little choice but to reduce fob prices. The tight supply had eased with less maintenance and higher crude runs at US refineries and lower crude prices on the back of negotiations to lift sanctions on Iran. Freight rates had climbed because of the grain season. And the monsoon season in India meant less interest from the world's largest buyer.

High-sulphur sellers had few other options besides India after late August, when China announced a law banning "unqualified" coke imports as of 1 January. While Chinese authorities have been mum on the standards, the rule solidified a trend that Chinese importers had been following all year — moving away from 6.5pc sulphur coke and towards less than 2pc sulphur. Already last March, as China held its National People's Congress, comments from the government had Chinese traders signaling a "structural" change in the import market as a result of tightening environmental rules.

Although China's regulations are still uncertain, it seems unlikely the country will return to being a major importer of high-sulphur coke. This means sellers must still pin their hopes on India. But Indian demand is still under pressure, not just from Saudi coke and coal, but also from new domestic coke production that is beginning to come on line. Indian refiner IOC's 300,000 b/d Paradip refinery in Odisha started up in late November after long delays, and a 67,000 b/d coker at Bharat Petroleum's Kochi refinery is also in the works. If both of these cokers were to successfully operate, they would account for most of India's current coke shortfall.

At the same time, the US could be set to produce more petroleum coke after US lawmakers struck a deal late in the year to lift the longstanding ban on crude exports. In theory, unencumbered global crude trading would shift more US light crude to less-complex overseas refineries while US refiners focus on the heavy sour crudes they were originally designed to process. If this does occur, US sellers could find themselves with lots of high-sulphur coke available in 2016 in a market that has little demand for the product.

Source: Argus