Coal prices in Asian seen jumping as cuts in China collide with rain spawned by La Nina

Thermal coal prices in Asia may jump as much as 50 per cent if rainfall caused by La Nina is heavier than expected, further tightening the market as China cuts production, according to Citigroup.

Prices at the Australian port of Newcastle, an Asian benchmark, may increase to US$90 a tonne if La Nina rainfall hinders Australian and Indonesian output, analysts led by Ed Morse wrote in a note e-mailed Monday.

China’s steep production cuts are simultaneously raising demand for seaborne coal, they wrote. Prices have risen 19 per cent so far this year to about $60 a tonne, according to globalCOAL, following five years of declines.

“We are now bullish on short-term thermal coal prices,” the Citigroup analysts wrote. “Coal demand could prove to be more robust than commonly thought. China’s coal production cut is also key to a tighter balance.”

Coal, one of the least loved commodities by analysts because of an oversupply and China’s efforts in cutting use of the dirty fuel to fight pollution, is now looking more favourable.

Bank of America analysts led by Peter Helles raised price forecasts for Newcastle coal for the second half of this year to $59, from an earlier projection of $46.50, the bank said in a note July 1. Citigroup expects prices to average $61 a tonne in the first quarter of 2017.

China’s coal output fell by 15.5 per cent in May from a year earlier, the most in data going back to April 2015, when the statistics bureau resumed releasing those figures. Spot power-station coal at the port of Qinhuangdao, a domestic benchmark, was at an average 415 yuan a ton as of Sunday, the highest level in a year, according to data from China Coal Transport and Distribution Association.

The Qinhuangdao price could reach 450 yuan by December as raw coal production is on track to fall 9 per cent this year, offsetting a 3.4 per cent decline in demand, Citigroup said. Deutsche Bank analyst James Kan said in a note on June 23 that Qinhuangdao price may rise to as high as 500 yuan a tonne amid government policy limiting number of days mines can operate.

The government has asked coal mines to reduce annual operating days to 276 from 330 and to run at 84 per cent of their production capacity, according to a statement posted on the website of the National Development and Reform Commission in May. The country plans to eliminate as much as 500 million tonnes of coal production capacity, and consolidate a further 500 million tonnes.

Provincial governments must set capacity reduction targets by July 15 and submit detailed phase-out plans by the end of this month, said Xu Shaoshi, chairman of the NDRC, the nation’s top economic planner, according to a report by official the Xinhua News Agency last week.