Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

We got it wrong on coal.

Falling inventories at Chinese ports might not be sufficient to set the market on fire, Gadfly argued in February. After prices instead rose about 42 percent, China's economic planners last month ordered a ramp-up of production at local pits to squash the boom. The prospect of a buyer's cartel should be able to push prices back down to between $50 and $60 a metric ton, Gadfly argued.

Um:

Winning Dirty
Crude oil prices have ultimately gone nowhere this year. Thermal coal prices have almost doubled
Source: Bloomberg

It's fairly easy to see what's happened: The promised domestic supply flood isn't happening, causing demand and prices for imported product to surge.

While the country's largest coal miner, China Shenhua Energy Co., managed to increase output 14.4 percent in September from a year earlier, reversing a decline over the previous eight months, the rest of the domestic industry hasn't been so nimble.

China Coal Energy Co., the second-biggest by sales, saw production volumes down 11 percent in September. At Shaanxi Coal Industry Co., output over the three quarters through September fell almost 18 percent. At Yanzhou Coal Mining Co. the measure dropped 6.8 percent, although in the September quarter things rebounded a little to a 2.9 percent year-on-year drop.

Overall, domestic raw coal production in September came in at just 244 million tons, the lowest monthly figure outside of the Lunar New Year season since 2009. Loadings of coal onto railway carriages are looking even bleaker, hitting their worst levels in data going back to 2005 -- suggesting the coal that is being sold is the stuff that's closest to power plants and often owned by the same company.

Pit of Despond
China's September raw coal output was the lowest outside of Lunar New Year season since 2009
Source: China Coal Resource, Bloomberg

Lifting coal production isn't always as simple as turning a key or pressing a button. Chinese miners are hemmed in by restrictions on the number of days they're allowed to operate, as well as basic geology: If you're mining a narrow coal seam, you can't necessarily just conjure a thicker one out of the rock.

At the outset, this looks like great news for anyone importing coal to China, and bad news for the global climate. Coal's emissions per unit of energy are the highest among fossil fuels, but it's the dirty stuff whose price has surged most after last year's Paris conference finally hammered out an agreement to limit emissions.

Burning Issue
Coal's emissions per unit of energy are nearly twice those of natural gas and well above oil products
Source: U.S. Energy Information Administration
Note: Anthracite is largely used for urban domestic heating. The highest-quality thermal coal grades are bituminous; lignite and subbituminous coal are lower-grade. mmbtu = million British thermal units. One btu is equivalent to the energy produced by burning a match.

Since the conference wrapped up on Dec. 12, thermal coal at Australia's Newcastle port is up 89 percent and Brent crude has gained 32 percent, but the price of Japanese LNG import contracts is down 23 percent and solar modules have dropped 29 percent.

There's an important caveat, though. High prices in commodities markets are an even less trustworthy signal of future performance than in equities. More often than not, they're an indicator of short-term supply-demand mismatches, which will get flattened out once producers and consumers start responding to the price signals from traders.

Roll Out the Barrel
Outside of Japan, oil demand has been picking up on higher prices. Year-on-year changes in oil consumption by major importers
Source: International Energy Agency, Gadfly calculations

Looked at from the perspective of consumption rather than price, oil is doing pretty well. The 96 million barrels per day pumped in July was a record in 13 years of U.S. Department of Energy data.

Coal's picture isn't so rosy. In China, the decline in domestic output in September meant that apparent demand fell 20 percent from a year earlier. In the first nine months of this year, the country consumed about 311 million tons less than in the same period of 2015 -- a sum equivalent to almost a quarter of the global coal trade, and well on the way to Beijing's five-year target of cutting 500 million tons annually by 2020. The country is halting work on coal power plants that started construction this year and imposing restrictions in all but four of its provinces, to rein in expected overcapacity.

Burned Out
China's apparent coal demand has been running well short of prior years
Source: China Customs General Administration, National Bureau of Statistics of China, Gadfly calculations
Note: Apparent demand calculated as domestic output plus imports minus exports.

It's a similar picture with other major importers. South Korea has seen declining demand this year and expects the pattern to continue, India's energy minister is pushing power plants to stop coal imports, and Japan's more healthy demand is being supported only by delays in restarting its nuclear power stations after the 2011 Fukushima disaster.

After all, the hallmark of a mature commodity market is stable rather than surging prices. Oil's global nature and its network of traders, producers, storage tanks and strategic reserves mean it doesn't jump around like less freely traded commodities such as lithium or rare earths -- or coal.

As demand for the dirtiest power source shrinks -- first as a share of the world's energy mix, but soon in absolute terms -- it's quite likely that supply-demand mismatches will if anything become more frequent, leading to both price slumps and spikes like the one we're seeing now.

Volatility is good news for traders, and there's probably a window in the coming months when prices will remain buoyant before Chinese demand drops around Lunar New Year and domestic mine supplies finally come on-stream. But hold on for a bumpy ride.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net