This year’s big story in the commodity markets has been coal. After years of falling prices, falling demand and rising supply, coal prices have leaped into action this year, and the gains have been nothing short of astounding. After a decision by Chinese regulators to control coal market supply, coal prices spiked during the first ten months of 2016.

Chinese coal production dropped 11% in the first 10 months of 2016, compared to the same period a year earlier as regulators imposed a 276-day production limit on mines around the country.

Jefferies Upgrades 5 Firms On ‘Game-Changing’ Coal Price Inflation

Ramius Archview Credit Makes Profitable Bet On Rust ..

Thermal coal prices have jumped nearly 80% since May. Meanwhile coking coal, used for steel-making, has had an even more dramatic rally this year, more than tripling in price.

coal-prices-1 Coal Prices coal-prices-2

But now, it looks as if coal is falling back down to earth. Regulators have now increased the number of days China’s coal mines can operate, reversing earlier restrictions in a bid to control surging prices and boost production so that there is ample supply for heating during winter.

Coal Prices: Further Declines To Come

According to a note from Jefferies at the end of last week China’s coal import index, which has historically been highly correlated to domestic benchmarks, fell Rmb95/ton over 11 days, around 10% off the recent high of Rmb750/ton.

Analysts at the investment bank believe coal prices could fall further during the next few weeks as National regulators were “caught off guard by 1) the zeal of local regulators to restrict production, 2) unexpectedly high power demand and 3) hot money flooding commodity markets. This has resulted in nosebleed prices through a painful inventory restocking season.”

The market has become distorted and needs to come back down to earth:

“Price inelastic restocking demand ended. We believe real thermal coal demand collapsed at the beginning of September with the dissipation of summer heat. However, we believe price inelastic restocking during the Autumn shoulder months resulted in nosebleed prices. Before the NDRC shut down SXCoal’s benchmark prices, on a per kcal basis, the 4,500 kcal blend was more expensive than the 5,000 and 5,800 kcal blends at Qinhuangdao. This should not be the case as lower quality coal incurs more costs (e.g. transportation, processing, emissions) per kcal. The last time this happened was year-end 2013, when the 5,000 and 5,500 kcal blends priced higher than 5,800 kcal coal on an energy equivalent basis. Coal prices were rallying then due to inventory restocking, which could result in strange short-term pricing if power plants were building inventory of a specific blend.”