• Goldman raises its 2017 coking coal price forecast by 64%
  • The steelmaking ingredient is 2016’s best-performing commodity

Goldman Sachs Group Inc. has responded to the dramatic coking coal rally by saying higher prices for this year’s best performing commodity may be here to stay.

Spot hard coking coal has more than doubled this year to trade above $205 a metric ton as a new Chinese government policy reduced the number of annual working days at its mines. Goldman, in a note dated Thursday, raised its 2017 price forecast by 64 percent to $135 a ton and its 2018 estimate by 47 percent to $125. That compares to the current third-quarter contract price of $92.50.

“We update our price forecasts in order to reflect a different environment,” analysts Christian Lelong and Callum Bruce wrote in the report. “We see upside risks if current policies remain unchanged going into next year and the resulting shortage overwhelms the ability of producers in Australia and the U.S. to respond.”

The rally could add billions of dollars in earnings to the bottom line of struggling mining companies already reeling from years of suppressed prices for commodities like iron ore and copper. BHP Billiton Ltd. is the world’s biggest shipper of coking coal, which is combined with iron ore to make steel.

China’s output has fallen more than 10 percent so far this year as President Xi Jinping’s government ordered miners to lower output to the equivalent of 276 days of production, down from 330 days. China’s imports of coking coal jumped 45 percent in August to the highest in 13 months.

Supply Response?

Still, the bank cautioned that higher prices will lead to a global supply response and China could move to relax their constraints on production days at mines.

The government’s top planning agency decided in a meeting on Friday in Beijing to implement a plan to increase production, according to the people, who asked not to be identified as the information isn’t public.

Chinese steel makers have also petitioned the government for higher coal output as rising prices and tight supplies hurt operations, according to a letter seen by Bloomberg News on Wednesday from the China Iron and Steel Association to the National Development and Reform Commission.

“Although low inventories and limited supply should support prices in the short term, higher prices could attract up to 20 million tons per annum of recently idled mining capacity,” Goldman said. “The eventual adoption of a more flexible policy that allows Chinese production to partially recover should address any lingering shortages in 2017.”

Macquarie Forecast

Goldman is not the only bank to respond to the rally. Macquarie Group Ltd. this week raised its fourth-quarter price forecast by 84 percent and said prices in the first three months of 2017 will by 56 percent higher than it previously expected.

For now though, the big winners are likely to be producers outside of China.

“Higher asset values and a sharp improvement in profitability among global miners may not be the outcome that Chinese regulators had in mind,” Goldman said. “The main beneficiaries of higher-than-expected seaborne demand are the U.S., Australia and Mozambique.”

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