Physical thermal coal prices hit their highest level since the start of 2014 on Tuesday after tougher Chinese transport rules raised freight costs, adding to the earlier impact of Chinese caps on mining.
Coal prices started to soar after China introduced regulations in April to rein in rampant production overcapacity by limiting the number of days that miners can operate.
Prices were given a further boost in late September when China’s Transport Ministry introduced stricter rules for land transport, which pushed up freight costs.
“The new rules are expected to effectively crack down on freight over-loading by setting up higher standards, imposing stronger penalties and enhancing inspections,” Citi said in a note to clients at the end of September.
The biggest impact has been on Australian coal, the main price benchmark for the Asia/Pacific region, and a core supplier to China.
Australian prompt Newcastle cargo prices have shot up 12.8 percent since the end of September to $82 per tonne, their highest since January 2014. Newcastle cargo prices are up 68.4 percent from multi-year lows touched in January.
One trader said coal prices would keep rising until the situation in the Asia/Pacific region changes, which might not be until the end of the first quarter next year.
Another trader said China’s new policies had left the world’s biggest coal consumer “desperately short” of supplies at a time when demand seasonally strengthens ahead of winter.
Thermal coal imports surged in August, rising 20 percent month-on-month to 20 million tonnes.
Morgan Stanley, however, said it was possible domestic Chinese coal supplies could rise sharply in October and November to prevent a supply shortfall, and this “would be a short-term bear point for all coal prices”.
In a move to boost local supplies, China last week ordered major mines to raise thermal coal output by another 500,000 tonnes per day.
NOT JUST CHINA
Despite the near-term downside risk to prices, there are other supportive factors, including firm demand from developed markets such as South Korea, and across most emerging markets, as well as output cuts in Indonesia and Australia.
“An added bullish factor is by way of increased coal usage from the European power sector as a result of all the nuclear reactors out of action,” said Wayne Bryan, analyst at consultancy Alfa Energy.
French utility EDF said last week it would carry out tests on some nuclear reactors during the winter months, triggering fears about the French system’s ability to meet peak demand if temperatures fall below normal.
In Europe, coal import prices into Amsterdam, Rotterdam or Antwerp (ARA) are up 12.9 percent since the end of September at $71 per tonne, their highest since December 2014, and 69 percent above first-quarter lows.
In the futures market, API2 2017 coal prices have risen to $65.75 a tonne, their highest since January 2015.
Technical analysis suggests that futures might rise as high as nearly $80 a tonne in the next six months the contract has broken a key resistance level of $62.83.