Coking coal cools as China mines raise output

23 January 2017

Coking coal, the best performing major commodity of 2016, has made a weak start to the new year as Chinese mines have responded to pressure from Beijing to increase output.

The steelmaking ingredient rocketed last year after China introduced production curbs in an effort to improve the profitability of its heavily indebted coal industry.

The clampdown saw coking coal more than quadruple and peak at more than $300 a tonne in December — a level last seen in 2011. It also boosted the price of thermal coal, which is used in power stations to produce electricity and profits at major international producers such as Anglo American, Teck Resources and Glencore.

The steep increase in prices, however, caused consternation at steel mills and big utility companies as policymakers in Beijing gradually relaxed their working day rule with hundreds of mines given permission to raise production until the end of the winter heating season in March.

“As Chinese authorities had given the green light to revert coal mine working days to 330 days [a year] from 276 days, the market had a slowly growing supply of domestic coking coal,” said the Steel Index, a price assessment company, in a recent report.

Urged by National Development and Reform Commission, China’s state planner, to increase production, domestic mines have slowly started to increase output, putting pressure on prices both inside and outside the country, according to analysts.

“Domestic supply is increasing,” said Stephen Duck, a senior consultant at CRU, a consultancy. “You can see it quite clearly in thermal coal, where Chinese stocks have increased.”

On the demand side, many local steel mills in China are already well stocked for the winter season.

On Wednesday, premium hard Australian coking coal was assessed at $175.9 tonne by TSI, down 22 per cent since the start of the year. Meanwhile, thermal coal, which hit $110 a tonne last year, was trading close to $82 a tonne.

“While inventories will remain low in the near term, increased confidence in domestic supply has undermined the justification for an import price premium,” said Goldman Sachs analyst Christian Lelong.

In a recent report, Barclays said there was 30m tonnes of potential coking coal capacity offline in the US, most of which was shut in 2015 when prices averaged just $105 a tonne.

Meanwhile, mines in Australia, Canada and Mozambique, which were mothballed as coking coal slumped below $100 in 2015, have also been restarted, adding further supply-side pressure.

In addition, the cyclone season has so far passed without incident for Australia’s coking coal industry. Fears that flooding could lead to a supply crunch saw Glencore, a major producer, and Nippon Steel agree in December a price of $285 a tonne for the first-quarter supplies of coking coal.

Analysts expect the authorities in China to try to keep coal prices in a range that ensures the industry’s profitability but doesn’t raise the heckles of big power companies and steelmakers. This would mean Bohai-Rim — China’s benchmark domestic thermal coal which has an energy content of 5,500 kcal/kg — trading between Rmb470-Rmb600 a tonne ($69-$88), according to Mr Duck, and intervening whenever it moved out of that range for a sustained period of time.

Source – FT