A dramatic year for metallurgical coal

About a year ago, metallurgical coal embarked on a long journey of great volatility and disruption. It emerged as the best performing commodity in 2016 after several years of declining prices. Prices have dropped and spiked several times since then and the volatility continued in 2017 with a cyclone disrupting the market and eventually also affecting the way the commodity is priced. Although thermal coal prices also surged last year after several years of decline, they have been less volatile than coking coal prices.

Increased demand
Unlike thermal coal, the other type of bituminous coal which is used for turbines in electricity generation, metallurgical coal is used to produce coke for steel manufacturing and it is a less abundant form of coal.

The coking coal price is therefore closely linked to the dynamics of steelmaking economies. According to World Steel Association, 70% of steel produced today uses coal, and China is the most important part of the puzzle as it produces half of the total crude steel in the world.

China's crude steel output reached 808 million tonnes in 2016 and Metal Bulletin Research estimates production is on track to set an official record of about 840 million tonnes this year. As China is the largest producer and consumer of metallurgical coal, this increased crude steel output has pulled coking coal prices higher.

On top of rising coking coal demand in China, new restrictions on the mining industry which reduced domestic supply have put further upward pressure on metallurgical coal prices since last year. As explained in Metal Bulletin Research's Steel Raw Materials Market Tracker, the Chinese government implemented a cap on the number of working days for miners, which curbed domestic production of metallurgical coal and helped push prices higher last year.

Supply disruptions
Price are also very sensitive to interruptions in supply, especially anything that affects the world's largest producing region of metallurgical coal, Queensland in Australia. A trigger for the soaring prices in early April this year was a cyclone which broke down railway links transporting coal from the mines to the ports.

As the world's largest exporter, Australia shipped out 189 million tonnes in 2016 to mainly Japan, India and China, according to the Government of Australia. After miners declared force majeure due to floods and landslides after Cyclone Debbie, Australian exports halved from March to below 4 million tonnes April.

Steelmakers scrambled to find alternative supply of coking coal and prices spiked, as the chart shows. The shortfall led large buyers in China, Japan and India to increase their imports from Mongolia, Russia and Mozambique.

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