Photographer: Akos Stiller/Bloomberg

Greatest Skeptics of Coal Surge May Be the Miners Themselves

  • Coal jumped this year as China cut output to protect industry
  • Miners wary of restarting idled mines on China policy changes

Surging coal prices have been a surprise blessing for mining companies this year. Few of them seem to believe it will last.

The rally has been driven by Chinese policy changes that curbed production rather than any pickup in demand. That means producers who sought to survive a downturn by shuttering mines aren’t yet ready to buy into it.

Coking coal, used to make steel, has almost tripled this year while thermal, used to generate electricity, is up 56 percent. The biggest miners such as BHP Billiton Ltd. and Teck Resources Ltd. remain cautious on how long the rally will last. While Glencore Plc this week said it plans to restart a small mine, exports will be unchanged.

Coal prices jumped after China cut output to help lift prices for struggling miners and curb pollution, making the world’s biggest consumer and producer more reliant on imports to fuel its power stations and feed steel mills.

While higher prices are ordinarily good news for firms considering reopening operations, Chinese authorities are beginning to relax the policy that reduced output by about 10 percent this year. The National Development and Reform Commission has allowed selected large miners to bolster output to cool prices.

“The price rally is exciting for a lot of people that have got closed assets and are still sitting on them,” said Tom Price, a commodity analyst at Morgan Stanley in London. “But they would be nervous about the sustainability of the rally. They are probably very suspicious by about what’s causing the rally because it is all swinging on a policy shift in China.”

To read about Chinese capacity cuts and higher prices, click here.

Prices Surge

Goldman Sachs Group Inc. is among those predicting there will be some restarts. The bank estimates about 46 million tons of coking coal capacity closed between 2013 and 2015, and says more than 40 percent of that is likely to reopen and able to pay back start-up costs within six months. The bank last month raised its 2017 coking coal forecast 64 percent to $135.

Glencore, the world’s biggest thermal coal exporter, said Tuesday it was restarting an Australian thermal coal mine it idled last year because of higher Asian demand.

Hard Coking

Coal’s rebound comes after too much supply sent prices tumbling. Benchmark prices for Australian hard coking coal averaged $133 a metric ton in the third quarter and was quoted at $218.10 a ton on Tuesday, the highest in data going back to January 2013, The Steel Index data show. Thermal prices from the nation’s Newcastle port are trading near the highest in more than two years. It traded at $79.10 a ton on Monday.

Nippon Steel & Sumitomo Metal Corp., Japan’s largest steelmaker, agreed with Peabody Energy Corp. to buy coking coal at $200 a ton during the fourth quarter of this year, people with knowledge of the matter said. It’s the highest contracted price since 2012 and compares with $92.50 in the third-quarter.

The surge may not be enough. While a price of $135 for metallurgical coal, as the steelmaking fuel is known, may prompt some firms to resume operations, it won’t mean restarts for Canada’s Teck, Chief Financial Officer Ron Millos said last month in Toronto. Prices need to be higher for a while before shuttered mines open, CRU Group said.

“There is a lag time before any closed mines can reopen,” said Matthew Boyle, a Sydney-based industry consultant at CRU. “There is the issue of capital expenditure to bring them online, plus the need for getting labor and also mine plans need to be developed.”

Vulnerable Prices

BHP, the largest shipper of coking coal, last month said gains probably won’t last in the medium-to-long term. North American producers are unlikely to increase exports until they see sustained higher prices, according to Daniel Hynes, an analyst at Australia & New Zealand Banking Group Ltd.

Glencore, the world’s biggest thermal coal exporter, was monitoring the situation in China before decide when to increase output, Chief Executive Officer Ivan Glasenberg said in August. The Swiss commodity trader cut production by 15 million tons last year and is cautious about raising supply if it hurts prices, he said.

Indonesia, the biggest exporter is shipping below its peak capacity and there’s potential for about 70 million tons, 8 percent of global exports, to return to the market, Stefan Ljubisavljevic, a London-based commodities analyst with Macquarie Group Ltd.

Coal Expansion

More supply may come from Arch Coal Inc., one of the U.S. firms forced into bankruptcy in the past few years. The second-largest American thermal producer and biggest in coking coal last week said it completed financial restructuring and will emerge from Chapter 11 with $300 million of cash on its balance sheet. In a Sept. 30 investor presentation, it cited “attractive opportunities” to expand its biggest coking coal mines.

There are even plans for new mines. Warrior Met Coal LLC, which assumed ownership of bankrupt Walter Energy Inc.’s main assets in April, is considering re-opening an Alabama mine.

China’s production may look very different by the time those mines start. Just weeks after allowing some miners to raise thermal output by 500,000 tons a day, authorities discussed doubling that amount on Sept. 28. The nation has so far rejected an appeal from steel producers to boost coking-coal production as supply from the Shanxi province, which accounts for about a third of output, picks up after flooding.

It’s still set to be a good year for producers. BHP is more exposed to coking coal’s surge than other suppliers as its sells most of its product at the spot price rather than the industry’s benchmark quarterly contract price. The stock is up 63 percent in London this year. While coal sales represented 15 percent of its revenue last year, the division is likely to be a much bigger contributor in 2016 thanks to the rally.

Shares in PT Adaro Energy, operator of Indonesia’s largest coal mine, and Glencore more than doubled this year.

“The Chinese seem very willing to pull back production to control prices rather then just follow the usual rules of the jungle where marginal producers get knocked out,” said Ben Davis, a London-based analyst at Liberum Capital Ltd.

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