Financial Times Coal price surges on Chinese demand

By Javier Blas in London

Published: August 23 2009 19:06 | Last updated: August 23 2009 19:06

Coal prices have jumped to their highest in a year as a drop in Chinese domestic output forces the country to import.

The shift has particularly benefited the price of coking coal, used for steelmaking and much scarcer than thermal coal, which fires power plants.

Christopher LaFemina, mining analyst at Barclays Capital, said “Coking coal is one of our preferred commodities”, adding that the seaborne coal market was “turning the corner”.

The strength of Chinese imports has surprised coal miners Xstrata, BHP Billiton, Rio Tinto and Anglo American that were braced for a protracted period of low prices because of low demand in Japan, South Korea and Taiwan, the traditional buyers.

Vivek Tulpulé, Rio Tinto’s chief economist, said that the rise of Chinese seaborne coal demand was triggered by the closure of many small mines early this year.

Sharply falling coal prices in late 2008 and early 2009 put several high-cost mines in China out of business. This coincided with a crackdown by Beijing on illegal and dangerous mines. Domestic supplies were cut, and import demand rose.

China’s net imports of thermal coal were 24m tonnes in the first half of the year, against exports of 4m in the same period of 2008.

Net imports of coking coal rose to 12.6m tonnes between January and June, up from 1.1m in the same period last year. As prices have risen, domestic producers are bringing mines back into production, putting the sustainability of high coal imports into question.

The tightness of the market was illustrated in August when Consol Energy, a US-based miner, shipped the first cargo of US coking coal into China in five years. Usually, Australia supplies the Chinese market because of its proximity.

Spot prices for coking coal surged last week to $160 a tonne, up almost 40 per cent in the last three months and the highest in 12 months.

The spot price is now 24 per cent above the price at which annual contracts were settled for 2009-10.

Bank of America-Merrill Lynch recently raised its forecast for coking coal annual contract prices to $140 a tonne next year, up from $129 this year. Thermal coal spot prices have risen less, trading at $75 a tonne, up 25 per cent from March’s low of $60 a tonne, according to McClosley, the coal data provider. Thermal coal is still well below last year’s record of more than $180 a tonne.