Chinese coking coal imports have surged over the past year

LIU JIN / AFP / Getty Images

Coking coal prices have ripped higher in 2016, rallying over 240% from the lows seen late last year.

It’s been both an amazing and exciting rally after years of constant price declines, and one that looks set to deliver Australia’s a surprise trade surplus in the December quarter, something few considered possible earlier in the year.

This chart from the Commonwealth Bank goes someway to explaining why prices have been ripping higher, leading to the unbelievable percentage rise.

Monthly Chinese coking coal imports.

According to Vivek Dhar, a mining and energy commodities analyst at the CBA, imports rose by 40% year-on-year in September, taking the increase in the first nine months of the year to 20% compared to the same period in 2015.

While supply disruptions in both China and seaborne markets, along with an acceleration in steel output in the world’s largest producer, have contributed to the enormous lift in prices this year, Dhar suggests that the primarily reason underpinning the rally has been a decline in Chinese coal output.

“Production has dropped by around 10% in the first three quarters of the year after policy makers reduced the annual statutory working days for coal miners from 330 days to 276 days,” said Dhar in a research note released on Monday.

“The move was prompted by policy makers trying to address the overcapacity in China‚Äôs coal sector.”

While the Chinese government has recently relaxed limits on production levels to help alleviate price pressures, Dhar says that government-imposed limits “will likely be a structural trend and will provide sustainable support for coking coal prices.”

After supply disruptions clear, he suggests that spot prices are likely to settle around the $US100 a tonne level, although he expects that “the price adjustment process could still take 3 to 6 months to play out”.

“The other drivers (behind the price rally) — which includes operational issues at coal mines, weather impacts, train derailments and even Chinese stimulus — will likely all fade,” he says.

“The net impact is that premium coking coal prices will likely settle at levels like $US90-100/t (FOB Australia), which is higher than lows reached earlier this year ($US74/t), but significantly lower than current spot levels ($US255/t).”

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