Coal news and updates

One of the world’s most maligned commodities is staging a comeback.

 

Coal prices have soared this summer, after new mining restrictions curbed production in China, the world’s biggest producer and consumer. Benchmark prices for thermal coal in Asia, Europe and the U.S. have climbed by more than a third since April, while the price of coal used in steelmaking is up 20% from its 2016 nadir in May.

 

The rally is a stark reversal for the coal market, which has been in a protracted slide for much of the past five years. Ample production and waning demand in developed countries have pummeled prices for thermal coal, used in power generation. Demand for coking coal, used in steel production, has also softened as global growth has cooled and China reins in its industrial sector.

 

But efforts to overhaul China’s coal-mining sector—burdened for years by overcapacity—have perked up the market. In April, China’s State Administration of Work Safety introduced new coal-production caps, limiting the number of working days for its coal miners to 276 a year from 330 previously.

 

“That is massive,” said Robin Griffin, a coal analyst at commodities consultancy Wood Mackenzie, based in Australia’s resource-rich Queensland state. The curtailment has sent production tumbling 14% to 809.3 million metric tons in the second quarter of this year, according to an analysis of government data by Australia and New Zealand Banking Group Ltd. Official data show imports rising 17% year-over-year to just under 60 million tons in the same period.

 

 

“People got over their skis that demand for coal, being the dirtiest fuel, would just plummet,” said Harish Sundaresh, a portfolio manager who oversees commodity investments at the $240 billion fund manager Loomis Sayles. “What has actually happened is that Chinese production cuts have actually been larger than the consumption declines.” Mr. Sundaresh said he has been buying shares of coal producers and mining-equipment manufacturers.

 

The recent recovery offers a reprieve to the world’s beleaguered coal miners. In the U.S., the coal-mining sector has been buffeted by bankruptcies, amid competition from cheap natural gas and tighter emissions standards.

 

To be sure, coal prices remain far from their recent highs. In 2011, Asia thermal coal breached $140 a metric ton, according to Platts. Coking coal traded at more than $160 a ton when the Steel Index started tracking prices in 2013. At the start of August, a ton of each traded at $66.50 and $101.10, respectively.

 

In the U.S., benchmark thermal coal traded at $43.80 per short ton at the start of the month, according to Platts.

 

Despite their recent lift, analysts say several forces are likely to keep prices in check. China, like other big coal consumers, is trying to reduce its coal dependency has imposed limits on new coal-fired plant construction. India, another top coal user, is boosting domestic production with the long-term goal of phasing out coal imports.

 

The coal rally is coinciding with the peak demand period for the fuel. Thermal-coal demand typically runs hot at this time of year as summer heat in the northern hemisphere keeps air conditioners active.

 

In the market for coking coal, the cuts to Chinese production coincided with an energized steel market. Rising Asian steel prices gave production mills more cash to restock inventories of raw materials, including coal.

 

In addition, flooding in China has sparked speculation about extra steel demand to repair or rebuild damaged infrastructure and buildings.

 

These factors have helped to mop up a lot of the surplus cargoes sloshing around the seaborne market that resulted from an expansion of coal mining in places such as Australia, the world’s No. 1 exporter of steelmaking coal. “It has brought the markets almost back into balance for hard coking coal,” said Mr. Griffin.

 

In the first half of 2016, the value of high-ash Australian thermal coal—a particularly “China-centric market,” says Mr. Griffin—rose 22% versus a 5% to 12% rise in the price of various types of Indonesian thermal coal.

 

Wood Mackenzie forecasts prices for steelmaking coal to hold up over the coming months during what is a typically strong period for steel demand in Asia—China’s peak construction season—before slipping back to the high $80s a ton in 2017. It projects Australian thermal-coal benchmark prices to hold flat near US$60 a ton until the first quarter of next year before easing.

 

Chinese coal production peaked in 2012, and the country has been pushing to shrink its huge coal and steel sectors. The country has about 9,000 coal mines and as many as 1,200 will be closed in the coming years, according to Platts. The U.S., by contrast, has 833 active coal mines.

 

“One of the reasons why [China’s] reform plan was put in place was to reduce the number of smaller high-cost coal-miners in the country,” said Gareth Carpenter, editorial director for coal at Platts.

 

Traders said they are starting to feel anxious about how quickly prices have risen. Some worry that China could loosen the rules on its own coal output to support local industry.

 

“It’s definitely taken the market—and we include ourselves in that—by surprise over the last few weeks,” said Daniel Hynes, commodity strategist at ANZ. “The market suddenly realized that they were following through on their stated goals, and because expectations were so low, it may have just forced some buyers back into the market.”

SOurce: WSJ