Coal news and updates

Coal has been having a bit of a moment.

The laggard among major raw materials after the Bloomberg Commodity Index reached its nadir in January, since mid-May it's been on a tear. Benchmark thermal coal at Australia's Newcastle port has gained 24 percent over the past two months and hit its highest level in 16 months on Monday.

Perhaps paradoxically, the main cause of this bullish run has been declining Chinese coal demand. Beijing wants to eliminate about 500 million metric tons of coal production capacity over the coming years, equivalent to more than one-third of international trade in the stuff, or 13 percent of its total domestic production.The initiative is becoming a victim of its own success. Raw coal output in May was about 15 percent below its level a year earlier, and fell by about 121 million tons in the first five months of the year compared with the same period of 2015. If that rate is sustained over the balance of the year, when China consumes about 60 percent of its coal, the cuts will be significantly deeper than the government's 280 million-ton goal.

DEEP IN THE PIT

 

That's good news for miners offshore, which have been growing lean under recent low prices but aren't subject to Beijing's targets. Closing mines doesn't make electricity demand go away, so regardless of the long-term prospects for coal, China's power stations have been sourcing fuel to keep their turbines going.Don't hope for too much. There are many victories on the road to ruin, and even a dead cat can bounce. Aluminum prices have fallen 37 percent over the past five years, but have had monthly gains of more than 10 percent on three separate occasions.The problem for coal bulls is that rising prices work against China's overarching goal of reducing output, by encouraging unprofitable miners to stay in business. Beijing isn't known for its laissez-faire attitude to markets, so there's effectively a soft cap on further gains.The recent price increases are unsustainable, Lian Weiliang, vice chairman of the National Development and Reform Commission, told Xinhua News this week. "Coal prices shouldn’t rise too much or too fast," he said. Resources companies generally do best when prices rise too much or too fast, so those words should strike terror into the hearts of anyone in the business of selling coal in China.As if to confirm the worst fears of the industry, the biggest player in the market is looking for an exit. Shenhua Group is seeking a merger with China General Nuclear Power and has submitted a proposal to government regulators, people with knowledge of the matter told Bloomberg News on Thursday.Such a deal wouldn't mean closing down Shenhua's mines, but it would be a strong signal that the company sees better prospects in nuclear power and the generation sector more broadly, as opposed to its core business of digging fuel out the ground.Imagine how oil investors would react to Exxon Mobil seeking a merger with EON or Electricite de France, and you have an idea of what such a deal could mean.

SOurce: Bloomberg.com