Commodities | Sep 20 2016
A number of key factors have lined up in the coal market and the price canary has flown the cage, with coking coal surging significantly in August.
-Supply issues being aggravated by flooding in China amid government's planned production cuts
-Seaborne market unlikely to respond immediately, with Australian producers at capacity
-Prices likely to remain elevated for some months to come
By Eva Brocklehurst
A number of key factors have lined up in the coal market and let the price canary out of the cage. Chinese buyers have panicked and rushed to the market, with spot prices of premium hard coking coal touching US$200/t, a price that has not been witnessed since the disruptions caused by the Queensland floods in 2011-12.
Prices, near US$196/t FOB Queensland, are now 160% higher since reaching an all-time record low back in January. In August, total coal imports to China hit 26.6mt, over 52% above that of August 2015.
ANZ analysts observe the latest rally has underscored the impact domestic politics in China is having on global commodity markets. The effects of the government's planned mine closures have already been felt in thermal coal and are just now being felt in the metallurgical (coking) coal market.
China is targeting around 300mt of capacity to be closed in 2016 but as of July, only 38% of the target has been reached so far. If the government steps up its closures to meet its original target another 45mt of coking coal production could be closed in China this year, the analysts calculate.
Aggravating the supply issue, recent flooding in China has created domestic coal transport problems for local steel mills. Flooding has damaged road infrastructure and limited railway capacity. This has resulted in a boost to demand for coking coal from the seaborne market. The analysts calculate that imports in August surged over 100% year on year as the shortage increased.
Underlying pig iron and steel demand are still subdued so prices are likely to be driven by the supply side and, with the highest cost producers now making money, supply will undoubtedly react, the analysts expect. Nevertheless, exporters are not likely to be able to raise output immediately.
Outside of China there has been some tightness in the market and since prices weakened in 2014, high cost supply from North America has been taken out of the market and exports have been falling.
There are recent reports that Brazilian buyers have been struggling to get material, which the analysts suspect may explain why the panic buying has erupted in the market. Exports from North America are down 14% year on year for the seven months to July. North America is also unlikely to increase exports materially until prices show some signs of stability.
Australian producers, already at capacity, are struggling to respond to increased Chinese demand, and are now being hampered by wet weather. With long-term weather forecasts showing potential for higher-than-usual rainfall in Queensland there is also the probability of further disruption to exports.
If China's domestic output continues to fall, prices may remain elevated for some months, as support for steel demand continues with repairs and reconstruction over the next 6-9 months. Ultimately ANZ analysts envisage coking coal prices settling in the US$110-130t range, as supply tightness continues in both China and Australia.
Even though other countries such as Mongolia and US eventually take the opportunity to address any shortfall, prices are expected to be determined by domestic conditions in China.
China's apparent demand for iron ore also rebounded in August with imports up 18.3%. Domestic trade flows have been affected by bad weather in the north of the country, putting an increased reliance on imports.
Rising steel prices have in turn supported iron ore prices. Yet the analysts suspect, iron ore prices over US$60/t could mean domestic supply rebounds and places some downward pressure on imports.
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