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Thermal and coking coal prices are set to weaken in the coming months, though they are expected to rule higher than normal since the pace of the fall in rates will be slow.
Though the coal prices look bullish currently, there is underlying bearishness, according to analysts.
“While our long-term coal price forecasts remain bearish, we expect that the pace of decline will be slower over the period than we previously expected,” said Fitch Solutions Country Risk and Industry Research (FSCRIR) in a commentary. Thermal coal is used for producing electricity, while coking coal is used for making steel.
Coking coal is expected to rule over $310 a tonne during the remainder of the year but Fitch Solutions said slowing coking coal import demand from China will be the main driver of lower seaborne coking coal prices over the current quarter and the first quarter next year.
Price forecast revision
Analysts say Chinese government plans to keep its crude steel output unchanged next year could put pressure on coking coal prices.
FSCRIR has raised its average price forecast for Newcastle thermal coal this year to $132 a tonne from $85 and for coking coal to $225 a tonne from $165.
It said China’s energy shortage will likely ease during the current and next quarter which would drag thermal coal imports, resulting in weak global prices.
Currently, Newcastle coal futures on Intercontinental Exchange for delivery in January are quoted at $147 a tonne. Prices had skyrocketed to record highs of $269.5 a tonne in October on a surge in energy prices. On Zhengzhou Commodity Exchange, the January futures settled at 806.60 Chinese yuan ($126.49) a tonne on Thursday, a drop of nearly 12 per cent since November 1.
Fitch Solutions said Chinese coking coal prices have begun to weaken from record highs posted in October following Beijing’s intervention in the domestic coal mining and trading sector to improve coal supply.
On Thursday, the January futures contract on Dalian Commodity Exchange, China, was settled at 1,868 yuan ($292.94). Coking coal prices had zoomed to a record 3,995 yuan ($626.35) a tonne in October.
Uncertainty over timings
An IHS Markit report on global trend said thermal coal prices are set to weaken, though there was uncertainty over the timings.
Fitch Solutions said thermal coal prices will continue to be volatile during the current and next quarters, but they have peaked. Prices have nosedived from record highs as the power crunch in China has begun to abate and several provinces eased power curbs.
Of late, prices have begun to collapse as Chinese coal traders have begun dumping stocks to avoid losses. “We expect that China's government will continue to boost domestic availability of coal over the coming months, which should reduce import demand and depress seaborne coal prices,” FSCRIR said.
IHS Markit said by spring next year, thermal coal supply would have recovered and most end-users would have restocked resulting in demand being lower than currently.
Dragon’s output boost
On coking coal, Fitch Solutions said the Chinese government came up with policies aimed at lowering domestic Chinese coking coal prices. “We expect that China's government will continue to boost domestic availability of coking coal over the coming months, which should reduce import demand and depress seaborne coal prices,” it said.
FSCRIR said imports of coking coal from Mongolia to China will also increase in the coming months as the Covid pandemic disruptions have ended. Demand for coking coal in China will also be tempered by rising risks to the Chinese property market and thus ferrous metals demand from the construction sector, following Evergrande’s financial difficulties.
China’s steel production has seen consistent declines since June, on the back of government orders to reduce pressure on China’s power grid in the face of an acute power crisis.
The rating agency said outside of China, too, coking coal demand growth will begin to slow as “supply chain disruption and soaring energy prices are placing negative pressure” on steel production.
Analysts said any major hike will result in the Chinese government coming up with new policies to keep prices on leash.
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