Coal Prices Surge Higher, But Could Retreat Soon As Production Caps Are Lifted
Coal has been the big commodity surprise since January, with high-grade steel-making material more than doubling in price, but it’s unlikely that the great coal rush of 2016 will last much longer.
At $190 a ton, coking (or metallurgical) coal is back to a price last seen in 2012 with some low-cost producers, such as BHP Billiton, reported to be booking a profit of more than $100/t.
Energy coal, the sort used in the production of electricity, has also enjoyed a rally, rising by 40% to around $70/t.
Demonized But Still Popular
A number of factors have conspired to trigger the dramatic recovery in coal, a carbon fuel demonized for its polluting qualities and role in climate change.
New mining rules in China designed to curtail production have created an artificial shortage and led to a surge in imports, a development coinciding with mine closures around the world during a period of prolonged low prices.
The Chinese policy, which limits mines to 276 days of production per year, has had an effect on coal stockpiles, but signs are emerging of that rule being reversed with some mines being allowed to produce extra material to help curb the recent price rise.
The biggest worry for the Chinese Government is that its manipulation of production could lead to shortage of energy coal as the northern winter approaches, forcing electricity prices higher.
Morgan Stanley, an investment bank, noted the official concern in a research report into the Chinese coal industry which said the strong price sparked two critical questions: “What does the government do now? Boost supply to cap prices, or stick with (coal industry) reform?’ A bit of both, for now, was the answer.
The bank said that China’s top economic management agency, the National Development and Reform Commission (NDRC) likened the strategy to turning a tap on, and off, to try and achieve the twin goals of sustainable production in what remains China’s most important source of energy, and a reasonable price for miners.
The situation in the coking coal market is more complex because much of the high-grade material used to make steel is imported from countries such as Australia and South Africa.
Macquarie, an Australian investment bank, described the situation in the Chinese coking coal market as very tight. “There is a sense of panic among buyers,” Macquarie said.
But, there are also signs emerging that the panic could be short-lived with a tell-tale being that some recent coal transactions have been for tiny volumes, a sign that traders are taking advantage of the volatile conditions.
“There is a question to ask about how real or representative this rally really is?” Macquarie asked.
“Transactions on the trading platform globalCOAl over the past month, which feed into spot price assessments from various providers have totalled just 510,000t in volume.
“Two recent trades, done at $139.50/t and $160/t were both in 75,000t clips.
“These (tiny) transactions likely represent participants caught scrambling to cover shorts, and not necessarily representative of the market as a whole.”
Macquarie’s view is that without Chinese Government intervention in the market coal prices would be lower.
Morgan Stanley’s coal price forecast is for the annual Asian Reference price for energy coal to slip $2/t lower next year to $60/t before rising slightly in 2018.
However, to put that price into perspective the reference price in 2011 was $130/t, with the recent recovery in the short-term market not enough to return all mines to profitability.