Editorial: Metallurgical coal prices go through the roof

While so much attention this year has focused on gold, it’s metallurgical coal that has suddenly become the unlikely star performer of 2016.

Traders in metallurgical coal, also known as “coking coal,” saw the Steel Index price of premium hard coking coal jump another US$14.80 per tonne on Sept. 13 to a record US$195.70 per tonne, or up 20% in a week.

Since July, metallurgical coal prices have risen an astonishing 111%, and are up almost 150% since the start of the year, making metallurgical coal the best performing commodity of 2016.

Some analysts have commented that they haven’t seen such levels of “panic buying” since 2011, when widespread floods in key coal export regions in Queensland sent the price soaring to US$335 a tonne.

The latest price driver is the Chinese government’s decision to restrict the number of operating days at Chinese metallurgical coal mines to 276 days from the traditional 330 (i.e., operating roughly five days a week instead of the previous six days a week).

The policy change is apparently an effort to improve miners’ profitability to ensure they can repay bank loans. The policy has also had some spillover effect on thermal coal markets.

Metallurgical coal buyers in China such as steel mills and trading houses have been scrambling to make up the lost supply and have turned to the seaborne market to make up the shortfall.

Exacerbating the situation were heavy rains in August across China’s northern coal fields, which further depressed domestic coal supply, as well as domestic steel production displaying new strength and surprising on the upside.

Yet another factor driving prices up is a reported uptick in metallurgical coal demand from rival North Asian, Indian and European steel mills.

Australian metallurgical coal mines built to service the seaborne trade could become the biggest beneficiaries of this price surge as long as it lasts, with familiar brand names such as BHP Billiton, Glencore, Rio Tinto, Peabody Energy and Anglo American standing to reap the windfall after many difficult years.

Russian miners and Canada’s Teck Resources are also well placed to ride the metallurgical coal waves, even as the U.S. sits on the sidelines, since its domestic market was hurt much more deeply during the commodities downturn due to the relatively strong U.S. dollar.

The turnaround in metallurgical coal prices has added a wrinkle to Anglo American’s ongoing auction of its Moranbah North and Grosvenor metallurgical coal mines in Queensland, Australia.

Anglo already took a US$1.2-billion writedown on the two mines in its financial results in July, and had been looking to sell them for around US$1 billion in cash. It may now push for a higher price or take the assets off the table entirely.

The leading bidder in the auction, which has been managed by Bank of America Merrill Lynch, has reportedly been the duo of BHP Billiton and Mitsubishi, though two other bids have emerged from U.S.-based Coronado Coal and a consortium led by Xcoal Energy & Resources and Apollo Global Management.

But Australian investment bank Macquarie cautions that the surge in metallurgical coal prices owes as much to speculation as it does to fundamental factors. It says even if “current physical market conditions are very tight and there is a sense of panic amongst buyers,” metallurgical coal prices may only “hold for a few more weeks,” and could slide in the fourth quarter.

It should all make for interesting discussions during the next round of quarterly seaborne metallurgical coal contract negotiations for the October to December period.