It’s been a wild few months for coal. We’ve gone from wallowing prices to record highs in the blink of an eye. But there are signs it’s coming to an end.
Coking coal has been the craziest. As Chinese steel output has collapsed, coking coal has gone through the roof. This was always pretty stupid. Here are Dalian futures:
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This was largely driven by two factors which are now resolving. China’s top coal producing state, Shanxi, closed its borders for COVID then shut lots of mines owing to an accident.
Second, and the Mongolian border was closed, limiting coking coal imports.
There is also China’s limits on Aussie coal but it’s mostly going out anyway, just elsewhere.
The Mongolian border is now opening slowly while Shanxi is still shut for safety inspections. As well, steel mills are short of stock so it will take a while to adjust inventories.
Futures are pricing a slow fall for coking coal:
I reckon it will be faster and fall a lot lower as Chinese construction slows meaningfully. Back to $120 mid-next year.
Thermal coal has better prospects. Shanxi will reopen and there’s a lot of new mines coming on but China is very short of energy raw materials. As well, thermal coal’s blood brother, gas, is short in Europe owing to Russian supply problems. This is absorbing US gas via LNG which is in turn tightening Asian markets going into winter.
So the worldwide baseload power raw materials supply chain is stressed for now. To wit:
The Beijing Electric Power Industry Association has joined 11 coal-fired power companies in petitioning authorities to raise electricity rates to avoid bankruptcy amid surging coal prices.
Supply shortages have driven up coal prices in China and coal-fired power plants can only raise rates to accommodate increasing operational costs by as much as 10 per cent, with a large part of electricity prices fixed by the government. However, the National Development and Reform Commission, the country’s top economic planner, last year prohibited all rate rises.
The Beijing Electric Power Industry Association said last week that it had sent a letter to the Beijing Municipal Commission of Urban Management petitioning for increased rates. Five member companies had incurred losses in the first seven months of the year, ranging from 20 million yuan ($3.1 million) to 192 million yuan, the association said.
The petition echoed a letter sent by 11 coal-fired power companies within the Beijing-Tianjin-Tangshan power grid last month, which said they were suffering losses due to sharp rises in coal prices.
“It has severely disrupted normal electricity transactions and stable electricity supply … operations are extremely difficult, with some companies experiencing capital chain ruptures,” according to the letter.
Even so, futures are also pricing big falls for thermal coal over the next eighteen months which seems about right to me:
If that all plays out with iron ore going back to $60 then Australia’s term of trade will get murdered over the next year: