Chinese coking coal futures went ballistic on Monday, closing 'limit up' 7%

Photo by China Photos/Getty Images

When it comes to the raw ingredients used to make steel, coking coal, compared to iron ore, rarely gets a mention.

Whatever the reason, be it the wild gyrations in the iron ore price or other factors, you hardly hear a peep about what is still Australia’s second-largest goods export by dollar value.

However, that all changed on Monday, courtesy of an amazing surge in Chinese coking coal futures.

The most actively traded September 2016 contract on the Dalian Commodities Exchange closed at 1,217 yuan, up an amazing 7% for the session.

The only thing that prevented the price from surging higher was exchange rules preventing the contract from rising more than 7% from the previous day’s closing level.

In other words, it closed “limit up”, leaving it trading at the highest level seen since March 2014.

Amazing. From the low of 782 yuan struck on June 15 this year, the September 2016 contract has now rallied 55.63%.

Dalian Coking Coal Sept 2016 Future. Source: Thomson Reuters Eikon.

Helping to explain the price action — equally bullish as it was bizarre — was news that Chinese government had made progress in reducing excess coal capacity by advancing economic structural reform.

According to, a state-run news wire service, citing China’s National Development and Reform Commission (NDRC), coal output declined 9.7% year-on-year to reach 1.63 billion tonnes in the first half of 2016, widening from a 5.8% drop recorded in the same period in 2015.

The NDRC attributed the progress to the government’s continued efforts in reducing production output, eliminating outdated capacity and promoting mergers, reorganisation, and industry upgrades.

Helping to explain the price surge, the report stated that the subsequent decline in coal stocks “resulted in a narrowed decline for major coal business profits, reaching 3.5 billion yuan ($US525 million) in the first five months of 2016, down 73.2 % year-on-year, compared with a 92.5% drop in the first quarter”.

While the decline in output helped to underpin an improvement in profitability, the report also acknowledged that Chinese coal consumption fell to 1.82 billion tonnes in the first half of 2016, down 5.1% on the same period a year earlier.

Mirroring the bullish sentiment expressed in coking coal futures, albeit to a lesser degree, Chinese iron ore and rebar futures also jumped on Monday, closing with gains of 3.39% and 4.07% respectively.

The October 2016 rebar future on the Shanghai Futures Exchange closed at 2,607 yuan, the highest level seen since April 25. Separately, the September 2016 iron ore future on the Dalian Commodities Exchange finished the session at 503 yuan, again the highest level seen since late April.

Like the reason for the surge in coking coal, they too were helped by news of output curtailments across China’s steel sector.

Though no one is disputing the bullish price action in all three contracts, it is being driven by announcements that were made by the Chinese government months ago.

As the article pointed out, “the Chinese government made reducing excess capacity a top priority in late 2015 at the Central Economic Work Conference and put it at the center of the 13th Five-Year-Plan”.

“China plans to cut steel and coal capacity by about 10 percent — as much as 150 million tonnes of steel and half a billion tonnes of coal — in the next few years, with funds set aside to help displaced workers,” it wrote.

Still, the news that these curtailments are occurring has seen speculative forces in Chinese commodity futures — thought near-extinct after a purge in May this year — come roaring back to the fore.

However, at this point, all of the attention seems to be on the impact lower output levels will have on prices, with scant regard being paid to the reason why they’re being shuttered in the first place — weakening Chinese demand.

Nor has much attention been paid to the dilemma higher prices will have when it comes to forcing previously uneconomic producers to cease production at current levels.

At some point these factors, too, will need to be considered.

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