During the 9-month period ended 30 September 2022, the macroeconomic conditions in Europe and globally felt the principal impact of the armed conflict in Ukraine and the sanctions imposed on Russia. The war in Ukraine has caused great uncertainty for steelmakers in terms of security of supply, providing the impetus for a record increase in coking coal prices, exceeding historical highs by 200 USD/t. The prices of hard coals temporarily exceeded 670 USD/t (as of 14 March 2022) and the prices of other coal types also sharply increased: PCI above 650 USD/t and semi-soft to 575 USD/t. In the months that followed, the prices fell, reaching 270 USD/t at the end of Q3 2022. The average TSI Premium HCC index in Q1 2022 was 487.80 USD/t and fell 8.7% down to 445.52 USD/t in Q2 2022. In Q3 2022, it went down by 43.9% vs. Q2 2022 down to 249.75 USD/t. Europe’s ban on Russian coal imports and similar sanctions implemented by other Western countries, withholding of gas deliveries by Russia and a threat of energy crisis in Europe, changes in Chinese government policy, threats related to COVID-19 and weather disruptions in Australia brought about significant, unprecedented daily fluctuations in Australian coking coal prices. Prices of blast furnace coke increased following the outbreak of war in Ukraine, but the appreciation was less pronounced than for Australian coking coal. The prices of Chinese CSR 64/62 coke increased from below 500 USD/t in February 2022 to 680 USD/t in the second half of March 2022. On the European market, in March 2022, CSR 64/62 blast furnace coke prices increased by nearly 100 USD/t (compared to February 2022) to 700 USD/t. As in the case of coal, there was a decline in coke prices in individual months. The average price of Chinese coke in Q2 2022 was 593.2 USD/t and increased by 5.2% compared to Q1 2022 (563.8 USD/t). In Q3 2022, it went down by 28.5% to 424.0 USD/t FOB China, compared to Q2 2022. In the European market, blast furnace coke in Q2 2022 was priced at 663.3 USD/t and increased by 4.2% compared to Q1 2022 (636.7 USD/t). In Q3 2022, the average price of coke on the European market was 460.0 USD/t CFR, down 30.7% vs. Q2 2022.
The development of the market situation is exposed to significant risk and it is difficult to predict the long-term impact of the war in Ukraine on the European and global markets. Globally, the war in the territory of Ukraine has resulted in a less stable economic situation, higher inflation and rising interest rates. The war in Ukraine may affect markets important to the Group, including:
- steel market - the combined output of Russia and Ukraine in 2021 accounted for 5% of global steel production (97 million tons). Russia was the second largest steel exporter in the world, the main export markets being the EU (22%) and Asia (23%). Both Russia and Ukraine are among the world's largest exporters of pig iron. Approx. 28% of the EU’s and 35% of the U.S.’ imported pig iron in 2021 came from Russia. Ukraine was also a major supplier of iron ore to the Central European market. Since August 2022, ArcelorMittal suspended the extraction of this commodity in Ukraine. Crude steel production in Ukraine fell by 66.1% in the period from January to September 2022, to 5.5 million tons, compared to the same period of 2021. The reason for the lower production was the destruction of at least two large steel mills after the Russian invasion (in May 2022, the Ilyich steel mill and Azovstal in Mariupol), low production capacity utilization (from 30% to 50%) in other steel mills, but also severed logistical chains when Russia cut off supplies from the Ukrainian ports on the Black Sea;
- coking coal market - sanctions imposed on Russia as a result of its aggression on Ukraine may cause another reorganization of the global market and the necessity to increase overseas imports to the EU. Before the war in Ukraine, Russia’s share of coking coal imports to the EU was: approx. 10% for coking coal and approx. 30% for PCI coal. Ever since Russia’s invasion in Ukraine, the Ukrainian authorities have not been publishing data on domestic coal production. The coking coal market is also affected by the changes in the flows of the raw material, by redirecting coking coal to the steam coal segment as a result of a ban on Russian coal imports into the EU and many other countries;
- coke market - in addition to coke’s limited market availability, the market may be affected by factors associated with lower supply of specific types of coal. Lack of availability of PCI coal, of which Russia is one of the major exporters, may lead to increased coke consumption in the blast furnace process. Reduced availability of coking coals may increase interest in external purchases of coke;
- energy market – record increased in energy prices, fears for its availability affect decisions of steel concerns regarding periodic restriction of steel production, which may translate into lower demand for coke and coking coal;
- freight forwarding market – increased imports of offshore steam coal, increased strain on sea ports and rail routes may hinder coal and coke supplies to business partners.
So far the armed conflict in Ukraine has not triggered greater commercial and financial risk in the Group in terms of business partners paying their liabilities. The Group does not collaborate with entities registered in Ukraine or Russia, nor does it make direct deliveries to the above destinations. The sanctions imposed on Russia and the hostilities in Ukraine do not increase the risk of non-payment by the Group’s business partners. The Group analyzes the market situation and signals from its business partners that may point to deterioration of their financial standing and, if necessary, will update the estimates adopted to calculate the expected credit losses in subsequent reporting periods. The Group is a strategic supplier to steel companies in Central Europe, maintains regular contact with its buyers and fully met its contractual obligations in the period of 9 months ended 30 September 2022. The lack of supplies of coal, coke and hydrocarbons from Russia and Ukraine will contribute to a higher demand for the Group’s products and continuing high prices will impact the Group’s financial performance. Since the situation is uncertain, it is impossible, however, to predict how long such high prices will continue (despite decreases). The war in Ukraine has contributed to an increase in projected prices in the medium term, due to a reduction in the supply of low-cost Russian coal. The crisis in the market for energy raw materials in Europe may lead to changes in climate policy, which may positively influence the Group’s operating conditions in the medium term. The armed conflict in Ukraine has pushed up commodity prices in the market. This situation resulted in requests from some material suppliers (mainly steel-based) to renegotiate their contracts. In justified cases, the Group signed annexes to the contracts with suppliers. There has also been an increase in the prices offered by business partners for materials in ongoing tenders. The Group monitors the current situation in the steel market, and if the downward trend in the market continues, it plans to renegotiate contracts again with the aim of lowering material purchase prices. Even though the armed conflict has no direct adverse effect on the Group’s current sales activity, one cannot rule out the possibility that if the conflict escalates, or if economic sanctions are imposed this would affect the Group’s operating and investing activities in the future. The possible disruptions are as follows:
- severed or disrupted supply chains that may lead to limitations in the availability of raw materials from Ukraine and Russia that steel companies and coking plants need,
- disruptions in production continuity or higher production costs,
- limitations in the supplies of gas and coal from Russia,
- disruptions in electricity supply, deterioration of the country's energy security, and further increases in energy costs,
- increase in the prices of raw materials, as well as materials and services, which may have an impact on delays in investment processes and on the profitability of current and planned investments,
- disruptions to logistics in ports due to higher overseas imports of raw materials, i.a. iron ore,
- impact on the supply of metallurgical goods on the European market,
- cyberattacks against IT resources leading to a data leak and disinformation,
- hazards arising from the availability of employees.
As at the date of this report, due to the dynamic situation, it is difficult to predict the long-term economic effects of the war in Ukraine and its effect on the overall macroeconomic situation, which may indirectly affect the Group’s financial performance. The Group has not completed its analysis and quantification of the possible impact of the armed conflict in Ukraine on its current and future financial position, its operations and future financial results.
Source: Additional information for the consolidated quarterly report of the Jastrzebska Spółka Węglowa S.A. Capital Group for the period of 9 months ended 30 September 2022