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A testing time for the coking coal market

Published September 2016 by Daisy Tseng, Steel Raw Materials Editor, Metal Bulletin


Daisy Tseng from Metal Bulletin is the Coaltrans guest blogger for the September 2016 edition

One can hardly overlook the spot price movements of coking coal over the past month as this lower-profile steelmaking raw material emerged as one of the new darlings of the commodity market.


Metal Bulletin’s fob Australia premium hard coking coal index shot up by more than 40% in August alone to $139.04 per tonne at the end of the month. Prices have risen 80% from the start of the year and are at a 32-month high.


This is the sharpest surge and strongest recovery in recent memory.


What distinguishes this rally from previous rebounds is the fundamental support it is getting in the form of a supply tightness.


China’s determination in implementing its supply-side reform resulted in the country’s coal output falling more than 10% on the year during the first seven months of 2016, according to the latest available data from its National Bureau of Statistics.


Just last month, the provincial coal industry bureau of Shanxi province – China’s largest source of coking coal – said 15 mines would be shut down by the end of this year, which would eliminate 10.6 million tpy of coal production capacity.


Shanxi Coking Coal Group, the country’s biggest producer of the steelmaking raw material, has also announced plans to shut down eight mines this year, which would result in a combined production capacity of 5.35 million tpy being cut.


And these are just the first steps.


The Chinese government is aiming to cut 500 million tpy of coal production capacity by 2020.


Logistical constraints due to heavy rainfall and the resultant floods in north China in July had also given supply a squeeze. This short-term disruption, coupled with longer-term implications of the Chinese government limiting the number of working days of coal mines to 276 days a year (from 330 days), led to sources sharing with Metal Bulletin anecdotes of thousands of trucks queuing up in Shanxi to get coal.


Amid the domestic shortage, Chinese demand for seaborne materials increased. Coking coal imports rose 12% year-on-year in the January-July period to 31.48 million tonnes, according to Chinese customs data, reversing the trend of declining imports over the past two years.


Meanwhile in Australia, coking coal mines were also not operating at optimal rates.


Wet weather at the start of the year and in July resulted in 8-10 days of lost production at several mines and led to the declaration of force majeure at Curragh and Carborough Downs. Various sources also reported mining issues at several other mines.


These factors, along with various mine closures in North America over the past few years, led to supply – or lack of it – becoming the single largest cause of the rise in coking coal prices this year.


But no one had anticipated such a sharp jump either.


Among ten analysts polled by Metal Bulletin back in July, the most-bullish one put his price forecast at $105 per tonne fob Australia for the third quarter of this year. The July-August average of Metal Bulletin’s fob Australia Premium Hard Coking Coal Index is already $104.19 per tonne.


So whether this rally is sustainable is anyone’s guess.


While there is no doubt about the presence of fundamental support, prices going up by this much within such a short period of time is nothing to cheer about.


Panic buying has been heard in the market, and a number of participants are taking aggressive positions. Some buyers are fixing late November cargoes, but a handful are said to be already enquiring about January-laycan materials.


"As high as the market is climbing, it can turn around very quickly and drop like a stone again," one trading source said.


Higher prices will delay any planned mine closures. Miners may even look to reopen some of their shuttered operations. Warrior Met Coal in the USA, for one, is said to be planning a restart of its No4 mine in Alabama – formerly owned by Walter Energy – this month.


Though the market is divided about the possibility of the Chinese government easing its limit on working days for coal mines, Beijing may proceed with such a move, at least with some operations, as prices recover. The agility of some smaller Chinese mines also cannot be underestimated.


On the demand front, however, things are looking optimistic in the near term.


China is entering its peak season for steel demand and steelmakers’ margins remain positive.


India’s monsoon season is also coming to an end and its steel market is expected to pick up as well.


Historically speaking, buyers also tend to stock up a bit more coking coal towards the end of the year ahead of Queensland’s wet season.


Stronger-than-expected demand and weather-related disruptions will underpin the coking coal price rally and guide the market out of the doldrums of the last three years.


But any quick response from the supply side may see the market relive the pain all over again.


The testing time continues.




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