Coking coal prices have tumbled 40% and the CBA says there are more declines to come

Mandatory Credit: Craig Prentis /Allsport

Coking coal prices have had a wild ride over the past year, as demonstrated in a simple-yet-effective chart from RBC Capital Markets.

It’s been nothing short of amazing.

After soaring more than 300% from the lows struck in early 2016, fueled by government-imposed production cuts in China, a rebound in Chinese steel production and temporary supply disruptions in both seaborne and Chinese markets, prices have done a sharp turnaround in recent months, tumbling around 40% from the highs above $US300 a tonne struck late last year.

It’s in free-fall, even if prices, at least compared to recent years, remain elevated.

And there’s likely to be further weakness to come, according to the Commonwealth Bank.

A lot more weakness.

To Vivek Dhar, mining and energy commodities analyst at the bank, while Chinese production cuts — still ongoing — will provide support over the medium-to-longer term, it’s likely to be overwhelmed by the removal of temporary supply disruptions in the months ahead, sending prices spiraling lower.

“All in all, the reduction in China’s coal output will likely be a structural trend and will provide sustainable support for coking coal prices. However, the other drivers — 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 $US120 a tonne (FOB Australia).. lower than current spot levels of around $US186 a tonne.

In its mid-year economic and fiscal outlook (MYEFO) released in late December, the Australian treasury said that “liaison with a range of industry contacts revealed a widespread expectation that current price levels will not be sustained”, nothing that there was “considerable uncertainty around the pace and timing of possible price falls”.

As a result, it tweaked its methodology for coking coal prices in its budget assumptions, forecasting a “phased reduction in prices” to $US120 a tonne by the March quarter 2018.

Should Dhar prove to be correct with his forecast, and the current trend be maintained, treasury’s methodology change appears to be a masterstroke after years of criticism that its forecasts were too simplistic and prone to overstatement.

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