The coal and coke complex has shifted into a phase of high-level consolidation since September, with the tug-of-war between resilient cost support and the reality check of seasonal demand intensifying. Last week, the main contracts for both commodities corrected from their yearly peaks, exhibiting weaker momentum than the prior week yet still outperforming finished steel. Coking coal futures retreated from highs under the dual drag of anticipated mine restarts and a climbing auction failure rate, briefly plunging over 3% intraday; coke futures followed suit but saw a more contained decline, reflecting spot market underpinning from the completion of the fifth round of price hikes. During this period, rebar and iron ore traded on a softer note, while the relative strength premium of coal and coke over steel products narrowed.

Spot market dynamics diverged. In coking coal, online auction sentiment cooled notably, with the failure rate surging from 0% on August 31 to a peak of 71.4% on September 10 before easing to 42.4% on September 11. Prices for mid-sulfur and high-sulfur blending coals began to soften, although premium grades like the low-sulfur primary coking coal from Lvliang, Shanxi, maintained firm transaction levels. For imported Mongolian coal, at the Ganqimaodu border port, prices for raw Mongolian No.5 coal stood at 1,694 yuan/ton and washed coal at 2,019 yuan/ton; while sentiment weakened with the futures downturn, underlying support remained intact.

In coke, the fifth round of price increases was fully implemented, with prices for Lvliang quasi-first-grade dry-quenched coke around 2,090 yuan/ton and Rizhao's equivalent at approximately 2,470 yuan/ton. However, spot trading at ports was the first to turn down, with port metallurgical coke prices falling by an average of 50 yuan/ton on September 9, followed by modest rebounds over the next two sessions. Post-hike, the average national profit per ton of coke improved to -17 yuan/ton, with Hebei's quasi-first-grade coke achieving a profit of 64 yuan/ton, Shanxi 43 yuan/ton, and Shandong 15 yuan/ton. While some regions have edged into marginal profitability, the cumulative increase in coking coal prices still outpaces coke, leaving the majority of independent coking plants in a loss-making position.

Turning to fundamentals, supply is showing signs of marginal recovery while demand continues to display weakness. Domestically, the resumption of production at previously halted mines is progressing, improving supply conditions. According to the latest survey by Mysteel, the capacity utilization rate of a 523-sample coking coal mine group rose by approximately 4.32 percentage points to about 70.8%. Daily raw coal output increased by 66,000 tons to roughly 1.589 million tons, and washed coal output grew by 34,000 tons to around 662,000 tons – both marking the largest increases since the May safety incident. Raw coal inventory stood at 4.065 million tons and washed coal at 1.315 million tons, with both recording minor builds. This production recovery has fostered optimistic expectations about domestic supply restoration. Additionally, Shanxi Province issued a notice on the orderly promotion of coal mine work resumption, but a "restart without full volume" issue persists, and illegal over-production continues to be phased out. Absolute output remains below pre-incident levels, meaning the structural supply constraint hasn't been fundamentally resolved.

On the import front, Mongolian coal throughput at border ports remains subdued with rapid inventory depletion. Average daily truck traffic at the Ganqimaodu port fell from the normal 1,300-1,400 vehicles to as low as 500-600 in August. Following a China-Mongolia meeting on September 8, clearance efficiency improved, with daily crossings recovering to over 700 by September 10, but the improvement has been limited. Port inventories have dropped to low levels, keeping spot Mongolian coal supplies tight. While a second working group meeting between border management departments in Ulaanbaatar and a temporary easing of Mongolia's diesel supply issues may gradually lift throughput, a series of holidays starting in late September will lead to port closures, limiting any near-term surge in clearance volumes.

For coke, the fifth round of price hikes significantly narrowed losses for coking plants, prompting a marginal uptick in operations. Mysteel data shows utilization at independent coking plants (full sample) rose 1.70 percentage points to 66.71%, with daily output increasing by 14,600 tons to 572,900 tons. For the 230-plant sample, utilization increased 1.75 percentage points to 66.21%. Meanwhile, 247 sampled steel mills' captive coke output edged up slightly. With improved profitability—the national average profit per ton of coke rebounding by 69 yuan week-on-week to -17 yuan—some plants are showing a stronger inclination to boost production and ease their reluctance to sell, indicating a nascent rise in coke supply.

Demand-side signals are mixed but leaning bearish. While hot metal output remains elevated, steel mill profitability is severely strained, and the anticipated seasonal demand boost has yet to materialize. Mysteel's survey for the week ending September 11 showed blast furnace operating rates at 247 sample mills increasing 0.48 percentage points to 83.12%, but capacity utilization dipped 0.19 percentage points to 88.73%. Daily hot metal output eased by 5,300 tons to 2.3629 million tons, down 42,600 tons year-on-year but still within a medium-to-high range, providing some rigidity in coke demand. However, the steel mill profitability rate has collapsed to just 7.79%, a plunge of 22.51 percentage points week-on-week and 52.38 percentage points year-on-year, hitting a new annual low. The relentless rally in coal and coke prices has severely compressed steel margins, with average losses at mainstream Tangshan sample mills exceeding 100 yuan/ton. Some mills are nearing the critical threshold for proactive production cuts. A further widening of losses could trigger a wave of blast furnace maintenance, exerting substantial downward pressure on hot metal output and, consequently, coke demand.

End-user steel demand offers little respite, as the "Golden September" seasonal uptick has not materialized. Total steel inventory across the five major products stood at 15.5461 million tons, a modest 1.16% week-on-week decline, indicating slow destocking. Consumption edged down 0.2% week-on-week, underscoring weak demand. With supply constrained by squeezed margins, the market is in a delicate balance. Cost support from coal and coke provides a floor for steel prices, but passing these costs through to finished steel is fraught with difficulty, and procurement activity has lacked sustained volume.

Inventory levels across the complex remain low, but the distribution is telling. Coking coal inventories across all segments are near historic lows, offering price elasticity but limiting upside potential. The 523-sample mine group saw its total coal inventory increase by 64,800 tons week-on-week to 5.3795 million tons, still a considerable 1.8977 million tons below last year's level and near a three-year trough. Independent coking plants held 9.6803 million tons of coking coal, a slight 0.49% build, indicating cautious restocking amidst high prices. Steel mills' inventories increased by 45,700 tons to 7.3861 million tons, providing roughly 11.79 days of usage, with mills prioritizing inventory consumption and on-demand purchases due to profit pressures. Port stocks of imported coking coal fell by 120,000 tons to 3.18 million tons, continuing their downward trend since mid-August. The overall low inventory environment amplifies the price impact of any supply-side disruptions, but high prices are dampening downstream purchasing interest, a signal already flagged by the surge in auction failure rates. Pre-holiday restocking for the Mid-Autumn Festival and National Day remains a potential near-term price catalyst, while a shift to more conservative inventory strategies by loss-making mills poses a downside risk.

Coke presents a contrasting picture with noticeable upstream destocking and minor downstream replenishment. Inventories at independent coking plants decreased by 138,500 tons to 835,300 tons, driven by production cuts and smooth sales, leaving spot supplies tight. Mills increased their coke inventories by 62,500 tons to 5.9244 million tons, or 10.52 days of usage, reflecting limited buying for holiday preparation, though overall procurement remains controlled. Port stocks further contracted by 49,500 tons to 1.942 million tons, continuing a four-week slide. While the coke supply-demand balance remains relatively tight, the slight increase in steel mills' inventory coverage days, combined with their rapidly deteriorating profits, makes their acceptance of a sixth price increase highly unlikely, setting the stage for intensified negotiations.

Adding a macro overlay, overseas rate hike jitters are adding pressure. The anticipation of a US Federal Reserve rate hike in September has intensified, becoming a key risk event for the week. The Fed's September meeting is scheduled to conclude on September 17, with the current target range at 3.50%-3.75%. Market pricing shifted dramatically after the August CPI release on September 12. Goldman Sachs changed its call from "on hold" to predicting a 25 basis point hike, and 16 of the 20 institutions surveyed by the Wall Street Journal now expect a hike. The CME FedWatch tool shows the probability of a hike has surged to 86.2%. Such a move could pressure commodities through a stronger US dollar, higher holding costs, and dampened demand expectations. For the ferrous complex, the direct impact may be limited given the domestic pricing of coking coal and coke, but indirect effects through higher global financing costs, potentially curbing infrastructure spending and manufacturing expansion in emerging markets, pose a medium-to-long-term demand risk. Additionally, escalating US-Iran tensions around the Strait of Hormuz have pushed crude oil above $100 per barrel, raising energy costs that could spill over to bulk commodities and solidify the Fed's hawkish stance by fueling inflation expectations.

In summary, the market narrative is pivoting from supply-side constraints to demand-side deterioration. Following the sharp, supply-disruption-driven rally in August, September has been marked by high-level volatility and structural divergence. For coking coal, domestic mine restarts are underway but slow, Mongolian imports remain far below normal, and low inventories alongside pre-holiday restocking provide short-term price support. However, cooling auction sentiment and price resistance suggest a dimmer outlook, with futures leading the way down. For coke, the fifth round of hikes has restored profits to near breakeven, likely signaling the end of the tightest supply phase. Yet, with steel mill profitability at a yearly low, cost pass-through severely impaired, and port prices already easing, a sixth round faces formidable opposition.

This week, expectations lean towards a volatile, weaker performance for both coal and coke. The market's focus has shifted from the supply contraction narrative to the widening losses of steel mills, with trading logic reverting to a negative feedback loop and opening the door for further downside correction in futures. It is advisable for holders of long positions to consider taking profits and adopting a wait-and-see approach until the direction becomes clearer. The key test ahead lies in supply-side recovery: if domestic mine restarts and Mongolian coal imports remain limited, the low inventory reality and structural shortages will continue to provide hard price support, limiting any deep decline. Conversely, if domestic output accelerates and Mongolian imports substantially recover, the resultant supply loosening could deepen the negative feedback chain and unlock further downside for futures prices.

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