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Coking coal prices just made their biggest move in 5 years

DANIEL MIHAILESCU / AFP / Getty Images

Coking coal prices are heating up, boosted by another bout of fiscal stimulus in China along with a swathe of supply disruptions worldwide, spurring shortage concerns.

The spot price for premium coking coal has now rallied by over 60% since mid-February, with gains accelerating last week by the most since early 2011 when devastating floods hit parts of southeast Queensland, disrupting major supply chains.

The chart below from the Commonwealth Bank shows the spot and contract prices for premium coking coal from Queensland over the past two years.

It’s been a remarkable turnaround following years of constant price declines.

Vivek Dhar, a mining and energy analyst at the Commonwealth Bank, puts the sudden spike higher down to the twin factors of supply disruptions and an increase in Chinese infrastructure and property investment.

Several highways in Shanxi, a major coal producing province, have been closed for repairs following heavy rainfall at the end of July. Competition for railway freight space with thermal coal has also led to a shortage of coking coal at Chinese steel mills. Outside China, supply has also come under pressure. Several hard coking coal mines in Queensland are undergoing maintenance or facing production troubles. Vale has also stopped rail transport at its operations in Mozambique due to militant attacks.

A resurgence in China’s manufacturing and property construction sectors this year, thanks largely to policy makers resorting to stimulus, has helped support commodity prices generally.

Looking further ahead, Dhar suggests that the price spike will reverse, although he suggests this won’t occur for several months yet at a minimum.

“So long as Chinese steel mills enjoy healthy margins, spot and contract coking coal prices will likely remain supported. Though downside risks do exist,” he says.

He suggests that high prices may also incentivise US and Mongolian coking coal exporters to enter the Asian market and address any shortage concerns.

According to the Australian government’s Department of Industry, Innovation and Sciences, Australia’s metallurgical coal production is forecast to increase by around 2% to 192 million tonnes in the current financial year.

In the department’s latest resources and energy quarterly report, released in July, it forecast that Australia’s metallurgical coal export earnings were likely to decline by a further 5% to $A18.2 billion in 2016–17 due to “lower prices and subdued growth in volumes”.

Australian coal exports — both metallurgical and thermal — were worth $A37 billion last year, according to Austrade, accounting for 11.6% of total Australian exports of goods and services, second only to iron ore in terms of total value.

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