Photographer: Dado Galdieri/Bloomberg

Unloved Coal Seen Surging as China Cuts Collide With La Nina

Updated on
  • Prices may rise 50% if La Nina rain worse than expected: Citi
  • Bank of America also raised forecast of Newcastle coal price

Thermal coal prices in Asia may jump as much as 50 percent if rainfall caused by La Nina is heavier than expected, further tightening the market as China cuts production, according to Citigroup Inc.

Prices at the Australian port of Newcastle, an Asian benchmark, may increase to $90 a metric ton if La Nina rainfall hinders Australian and Indonesian output, analysts led by Ed Morse wrote in a note e-mailed Monday. China’s steep production cuts are simultaneously raising demand for seaborne coal, they wrote. Prices have risen 19 percent so far this year to about $60 a ton, according to globalCOAL, following five years of declines.

“We are now bullish on short-term thermal coal prices,” the Citigroup analysts wrote. “Coal demand could prove to be more robust than commonly thought. China’s coal production cut is also key to a tighter balance.”

QuickTake Confronting Coal

Coal, one of the least loved commodities by analysts because of an oversupply and China’s efforts in cutting use of the dirty fuel to fight pollution, is now looking more favorable. Bank of America analysts led by Peter Helles raised price forecasts for Newcastle coal for the second half of this year to $59, from an earlier projection of $46.50, the bank said in a note July 1. Citigroup expects prices to average $61 a ton in the first quarter of 2017.

Falling Output

China’s coal output fell by 15.5 percent in May from a year earlier, the most in data going back to April 2015, when the statistics bureau resumed releasing those figures. Spot power-station coal at the port of Qinhuangdao, a domestic benchmark, was at an average 415 yuan a ton as of Sunday, the highest level in a year, according to data from China Coal Transport and Distribution Association.

The Qinhuangdao price could reach 450 yuan by December as raw coal production is on track to fall 9 percent this year, offsetting a 3.4 percent decline in demand, Citigroup said. Deutsche Bank analyst James Kan said in a note on June 23 that Qinhuangdao price may rise to as high as 500 yuan a ton amid government policy limiting number of days mines can operate.

The government has asked coal mines to reduce annual operating days to 276 from 330 and to run at 84 percent of their production capacity, according to a statement posted on the website of the National Development and Reform Commission in May. The country plans to eliminate as much as 500 million tons of coal production capacity, and consolidate a further 500 million tons.

QuickTake El Nino and La Nina

Provincial governments must set capacity reduction targets by July 15 and submit detailed phase-out plans by the end of this month, said Xu Shaoshi, chairman of the NDRC, the nation’s top economic planner, according to a report by official the Xinhua News Agency last week.

China Coal Energy Co. led coal miners higher in Asia on Tuesday, rising as much 5.7 percent, the biggest intraday gain in three weeks. The company on Monday forecast a profit for the first half of 2016, flipping from a loss in the same period last year. Yanzhou Coal Mining Co. climbed as much as 4.7 percent and China Shenhua Energy Co. added as much as 4.2 percent.

— With assistance by Jing Yang

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