The explosive rally in coking coal prices may not be over yet

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It’s been some kind of year for coking coal prices.

After a prolonged and largely monotonous slump in prices since 2011, prices have been on a tear in recent months, buoyed by a combination of factors that include China’s infrastructure-led stimulus push, reforms to China’s coal sector and supply disruptions, both in China and abroad.

According to pricing from Metal Bulletin, the free on board spot price for premium hard coking coal from Australia’s east coast has jumped from $US72.55 a tonne to $US186.86 a tonne from the lows in January this year, representing a tidy gain of over 150%.

Source: HSBC

And the bullish price action may not be over yet.

Mirroring the surge in spot markets, quarterly coal contract prices are now following suit, with some of the figures being reported coming in significantly higher than even the most optimistic of forecasts.

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

Peabody Energy has reportedly settled a contract to sell premium coking coal at $US200/t (FOB Australia) to Nippon Steel, well above expectations. If established as the benchmark, the contract would imply a significant jump in contract pricing from $US92.5/t (FOB Australia) in 3Q16 and mark the highest contract price since $US225/t in 3Q12.

Anglo American and Glencore have traditionally set the hard coking coal benchmark, says Dhar, suggesting that contracts for the current quarter could be more than double that from the last quarter based on latest indicators, in line with the movements seen in spot markets.

In an interview with Bloomberg last month, Daniel Hynes, a senior commodity strategist at ANZ Bank, said that “if spot holds up around these levels until the supply talks start, it’s potentially game on for a significant jump in contract prices”.

Based on early evidence, it appears the game has already started.

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