As coking coal prices surge to a 5-year high there's signs that increased supply is coming

Getty/Corey Davis

Coking coal prices have ripped higher in 2016, rallying over 250% from the lows seen late last year.

Now, in response to the price surge — caused by a combination of factors including reduced output in China, continued strength in Chinese steel production and supply disruptions in seaborne markets — Australian suppliers are bringing mothballed mines back into production, looking to capitalise on the sudden and sharp spike in prices.

Vivek Dhar, a mining and energy commodities analyst at the Commonwealth Bank, explains:

Glencore plans to restart its Integra coal mine in New South Wales next year, which could remain operational until 2018, to take advantage of surging coking coal prices. The company is aiming to produce 1.3 Mtpa of semi hard coking coal at the mine next year, which has been on care and maintenance since July 2014. Glencore announced earlier in October that it will resume operations at its 6Mt Collinsville thermal and coking coal mine in Queensland. Indian steelmaker Jindal Steel & Power has also signalled plans to ramp output at its Wongawilli coking coal mines in New South Wales.

And who could blame them for restarting production given where prices currently sit?

On Tuesday, the spot price for premium coking coal lifted to $US266 a tonne (FOB Australia), leaving it at the highest level since September 2011, something Dhar put down to ongoing operational issues at South32’s Illawarra coal mine.

While the price action in recent months is undeniably bullish, Dhar, like others, doesn’t expect the rally will last, writing in October that spot prices would likely to settle around the $US100 a tonne level by mid-2017 as factors that have supported prices fade.

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