China moves to deflate coking coal

From Macquarie:

 It appears we are still some way off from the much-anticipated 4Q coking coal contract settlement. Industry reports suggest there is still a ~$50/t gap in negotiations between Nippon Steel and Anglo American ($160/t plays $212/t), with talks set to resume in Australia later this week. The backdrop for these talks has become even more interesting following an announcement from China’s NDRC on Friday that production controls will be loosened at almost 800 coal mines, including 350-380mtpa of coking coal capacity. This was the first signal from the Chinese government that it wanted to cool the met coal market. The announcement makes it potentially more difficult for a settlement to be reached and some market participants are now considering the possibility of no settlement and a move to index-linked pricing.

 Spot premium hard coking coal prices are currently ~$215/t FOB Australia. Latest available production data for the Chinese domestic coal market shows that in August production was still down around 15% YoY; although the supply situation is not getting any worse, production run rates are still about 200mtpa lower than they were at the end of last year on a raw coal basis (~100mtpa on a clean coal basis). This is a volume that cannot be replaced by the seaborne market in the short-to-medium term. Coking coal inventories at coke plants remain around record lows and while seaborne coking coal imports are rising, they have not risen very sharply, indicating the relative lack of international supply flex (unlike thermal coal). For all of these reasons spot prices have remain elevated and met coal producers were finally hoping to capitalise on this through the 4Q16 contract. Excluding BHP, miners will still be realising a price that relates to $92.50/t settled for 3Q16.