Bulk Trading Performance Review

Our iron ore business had another strong year in 2020. However, the coal market continued to face a number of challenges.

Coal

The year in the thermal and coking coal markets was characterised by an abrupt contraction in demand as industrial activity was impacted by COVID-19 and prices fell sharply. This was subsequently followed by a corresponding correction in supply. The main thermal coal indices of API2, API4 and Newcastle traded towards lows not seen since 2015, and in the case of Indonesian indices, to levels not seen since they were first created. For much of the year, thermal coal continued to be priced out of the generation stack by cheap gas wherever utilities could make the switch. Coking coal prices were down by an average of about 15 percent year on year. Global seaborne thermal and coking coal trade in 2020 was between 10 and 15 percent lower than in 2019. Every trade flow was impacted by COVID-19. The Atlantic thermal market was particularly affected, with flows into the Pacific closed completely as US, Colombia and South African exports fell. In addition, China continued to ration import demand for thermal and coking coal through the application of their quota system, which frustrated imports and placed further weight on seaborne prices, despite the arbitrage favouring imports at record highs.

Pre-pandemic, our objectives for the year were to consolidate Trafigura’s position as a reliable liquidity provider to our producers and customers across all the products we trade in (thermal, coking coal and coke), and to continue to develop growth markets in South East Asia, India and South America. However, after COVID-19 hit, our focus switched to mitigating the impact of the disruption caused by the pandemic on our suppliers and customers by readapting our cargo flows to meet fluctuating regional demand.

Overall, trading volumes were stable across all coal types traded. Thermal coal volume and profitability were in line with last financial year. Coking coal and coke volumes traded were in line with the previous year but profitability was impacted by a sharp fall in liquidity in destination markets resulting from reduced steel industry demand. Notably, having a global network with local representation across all major markets was very important during a period when international travel was not possible.

Coal continues to be replaced in the generation stack by renewables as the energy transition accelerates. For 2021, our priority is to continue to service our existing markets and customer base. Permanent mine closures in certain markets provide a supportive environment in the short to medium term.

Iron ore

The COVID-19 pandemic significantly affected the iron ore market’s supply-demand structure as well as the direction and volatility of prices. Seaborne demand remained inelastic owing to the difficulty of abruptly ramping industry processes up and down. Early containment of the coronavirus supported recovery in China, which remains the global clearing market with a 70 percent share of demand. At the same time, mining production was marginally disrupted due to the coronavirus and by adverse weather in some producing regions. As a result, the iron ore price grew steadily, surpassing the previous year’s surge following the tragic Brumandinho dam rupture in Brazil in January 2019.

Trafigura’s physical iron ore trading team had a strong year in terms of volume and profitability. Our supply chain for Brazilian iron ore through the Porto Sudeste export terminal continued to gain a reputation for reliability and consistency, and we concluded new term sales agreements with several European steel mills. In addition, a number of term contracts were signed with mills in China, complementing the regular spot business. Regions that have been a key focus for growth include Southeast Asia, where new steel-making capacity is being commissioned, and Europe, where we have gained market share by converting spot sales into long-term contracts. Also important to the book’s development has been the expansion of the portfolio beyond our captive volumes from Porto Sudeste to include origins. These now include Australia, Brazil, Canada, India, Mauritania, Mexico, South Africa and Sweden.

Looking ahead, we expect steel production to rise outside of China, making the iron ore market less singularly dependent on Chinese demand. The fundamental outlook for iron ore is a fine balance between supply and demand. Our priority is to work on expanding the seaborne trade and increasing Porto Sudeste’s market share in supplying Asian and European steel mills.

Ken Loughnan

Head of Bulk Trading