Chinese merchant metallurgical coke makers and integrated steel producers with coke plants are riding high on a spike in domestic LNG prices by boosting output of coke oven gas, a byproduct when making coke, sources told S&P Global Platts.
Local authorities in Shanxi province, China's largest coke producing region, have removed coke winter production cut targets on December 24 just to allow coke producers to produce more coke in order to get more byproducts to resolve the current supply tightness in the domestic LNG market, sources confirmed.
On the other hand, procurement managers in other regions such as Tangshan and Hebei, where winter coke output cuts are still in place, have turned to making changes in their coking coal blend by purchasing coal with higher volatile matter such as Chinese fat coal, to produce more COG.
Higher VM coals allow coke makers to produce more COG to capitalize on surging domestic LNG prices.
Coke makers are now pushing "coke ovens to full capacity to provide heating and gas for cities even though steelmakers are cutting back on coke consumption," an Australian coal mining source said.
The country's soaring demand for LNG imports this year have been fueled by cold weather and a government policy to shift to using gas for heating instead of coal that saw large-scale replacement of coal-fired heating with gas-fired boilers in domestic households.
This has resulted in gas shortages and surging trucked LNG prices in regions like Shandong, Shaanxi and Inner Mongolia during recent months.
Average domestic LNG prices in China have more than doubled from the start of October to Yuan 7,472/mt ex-LNG processing plant on December 22, before slipping to Yuan 5,344/mt on January 5, according to Shanghai Petroleum and Natural Gas Exchange (SHPGX) which monitors trucked LNG transactions from 50 LNG terminals and factories.
Robust domestic LNG demand had also supported a breathtaking rally in international prices, which advanced 32% since the start of October, on top of robust crude oil prices and persistent supply concerns at liquefaction projects in Asia.
The Platts JKM, the benchmark for LNG cargoes delivered to North Asia, soared to $11.35/MMBtu on January 9, the highest since November 6, 2014.
With limited domestic gas production, China imports most of its gas either through LNG tankers, or via pipelines from Central Asia.
China overtook South Korea to become the world's second-largest LNG importer in 2017, as imports surged 48.4% year on year to 37.89 million mt, according to data from S&P GlobalPlatts trade flow software cFlow.
WIDE MARGINS FIRE UP COG MARKET
Significant profit margins from liquefying COG and selling as LNG have prompted coke suppliers to alter production plans and revamp raw materials procurement strategies.
Gross profit margins from sales of LNG liquefied from COG at one large northern Chinese coke plant were $15 million-$20 million in December. Such levels were "unprecedented" because LNG margins previously had been close to negligible for the last two years due to low gas prices, according to one coke supplier.
Methanol, a widely-used feedstock in the petrochemicals industry, can also be produced from COG, said one producer.
For coke producers who have facilities to produce byproducts, around 0.35-0.4 Bcm of COG is produced for every 1 million mt of coke made, according to a survey of Chinese coke producers.
About 100,000 mt of LNG is produced from 0.6 Bcm of COG, and LNG liquefaction plants there typically have an output capacity of 150,000-300,000 mt/year, sources said.
One coke producer said his company has installed liquefaction facilities two to three years ago and high LNG prices created the opportunity to utilize these capacities.
Large coke makers with integrated LNG capacity can produce up to 290,000 mt/year of LNG, sources said.
However, only a few coke plants possess liquefaction facilities, which remain costly to build. In such cases, industry participants sell the gas to companies with the liquefaction facilities which in turn sell the LNG via trucks to smaller industrial customers.
COG is not sold into pipelines due to its lower calorific value and regulated pipeline gas pricing, sources said.
Furthermore, LNG has gained greater adoption as a transportation fuel due to environmentally friendly policies. For example, there was a ban on diesel trucks to transport coal to ports at Hebei, Shandong and Tianjin in early October 2017 due to environmental considerations.
The Platts assessed domestic Shanxi-Tangshan weekly coal truck freight, which is fueled by LNG, saw a price uptick on December 6, rising Yuan 40/mt on the week to Yuan 255/mt before hitting a high of Yuan 310/mt on December 27 due to persistent shortage of LNG.
COG DRIVE MAY FIZZLE OUT
However, industry insiders doubted coke makers will be able to capitalize on higher LNG sales over a prolonged period of time.
Domestic LNG prices have plunged in the last two weeks due to a shift back to greater usage of thermal coal for power generation, improved pipeline gas flows from Central Asia and significant restocking activity by Chinese terminal operators.
SHPGX ex-plant prices have since fall 29% over the December 24, 2017 to January 5, 2018 period.
It is unclear whether this was connected to the local government's decision to release winter coke production capacity curbs in Shanxi.
One market source said even at current price levels in the mid Yuan 5,000s/mt, margins were still healthy given estimated cost of production was at Yuan 3,000-3,500/mt.
A second LNG trader commented that this COG production trend could lose steam as LNG prices typically plummet after peak winter heating season ends, typically in early March.
"The Asian LNG market is seasonally driven, so there's not much money to be made when the winter ends," the Beijing-based trader said.
He added that the growth of the small and nascent COG market could be stymied by further anti-pollution government policies.
Furthermore, at a time when Chinese coke prices have seen dramatic hikes in the past two months due to government-enforced production cuts, another question was whether this loosening of production restrictions in Shanxi would effect a softening in coke prices.
The cuts were enforced in October, and market participants reported seeing prices moving up from tightness in December. Prices rose 15.45% in December to be assessed at Yuan 2,390/mt on December 28, Platts data showed.
However, Chinese coke prices started to show signs of softening in early January, according to market sources.
This was due to increased coke supply and healthy coke inventories at steel plants, adding downward pressure on coke prices.
Some participants attributed this partly to a short-term increase in coke production in reaction to high domestic LNG prices.
