Coking coal: The new gold?

Which asset has been the most profitable to own this year? High-quality sovereign bonds and gold have both seen some of the strongest price gains year-to-date, but there is another commodity which has seen its price more than double this year.

The price of coking coal has risen by 105% this year outperforming every other commodity by some distance. Over the past month alone the price of coking coal has increased by 47%. According to analysts at Macquarie, the current conditions in the physical coal market are very tight, and there is a sense of panic amongst buyers. The Australian bank expects this to continue for some weeks as inventories are rebuilt following Chinese production cuts earlier in the year.

coking coal photo
Photo by pixel2013, Pixbay

Coking coal: The new gold?

It seems that coal is not dead, or is not dead the time being. Traders appear to be clamouring to get their hands on the new black gold. Macquarie’s research on the market frenzy reveals the current HCC spot price is ~$160/t FOB Australia but offers of $180/t were seen on the globalCOAL trading platform earlier this week. To add some perspective at the beginning of the year, the spot price was under $80/t FOB.

According to a report from Bloomberg published today, the sudden squeeze in coal prices is being engineered by Chinese policymakers. The financial news site cites an agreement this week between regulators and miners to coordinate production. Bloomberg goes on to note a report from analysts at Citigroup who believe that China’s “comfortable range” for Bohai-Rim coal is 450 to 500 yuan a ton ($67 to $75). Under the new plan, Chinese miners will cut or boost output to keep coal prices within the desired range. Chinese miners will boost supply by 200,000 tons per day if prices gain for two consecutive weeks and climb above 460 yuan a ton, according to Bloomberg which cites a report.

It would appear that coking coal is the first commodity to benefit from China’s economic restructuring. The country is seeking to cut as much as 500 million tonnes of production capacity by 2020, equivalent to about 9% of its total output. During the first seven months of 2016, output fell by 10%. Low levels of domestic production and more imported coal will be a boon for companies like Glencore, BHP Billiton, and Rio Tinto, which have been struggling with low coal prices for years thanks to China’s supply glut. With new supply now being taken off-line, it looks as if China is breathing new life into the coal industry.