China's domestic coke producers have been enjoying stronger than usual margins due to the rally in steel prices and tighter coke supply in northeastern China, market sources said.
Margins for coke producers are typically in the range of zero to Yuan 100/mt ($14/mt) but at the moment producers in Shanxi, Hebei and Shandong provinces are enjoying margins of Yuan 200-250/mt, according to market sources.
This follows three rounds of coke price increases, which were accepted by the market as steel mill margins rallied in May, particularly for hot-rolled coil.
Domestic HRC margins averaged $36.27/mt in May, up from $11.28/mt in April, S&P Global Platts data showed. Domestic rebar margins averaged $71.28/mt in May, compared with $56.43/mt the month before, on strong demand from construction and infrastructure activity.
The strength in domestic coke prices has also been supported by coke capacity cuts in Shandong and environmental control efforts in Tangshan.
Market participants said there could be a fourth round of price increases for coke.
"Another Yuan 50-100/mt uptick is possible since demand for coke is firm and most steelmakers have low inventories and healthy steel margins," a coke producer said.
However, others felt this would create a situation where coke producers would be making stronger margins than steel producers, which could result in haggling over prices which usually favors steelmakers.
Further, seaborne iron ore prices of more than $100/mt CFR currently will start to eat into steel mill margins, making further coke price hikes unrealistic, according to sources.
"High coke margins are not sustainable in the longer term as steel margins will be eroded by higher iron ore prices," a coke trader warned, noting that steelmakers may seek to re-balance profit margins by depressing coke prices.