Metallurgical Coal Markets: A Volatile Price Ride

By Jim Truman, Wood Mackenzie

2016 was a year of enormous volatility in metallurgical coal markets and many uncertainties remain for 2017. Spot prices for Australian low‐volatile coal started out 2016 in the doldrums, averaging below US$80/t and by mid‐November, ascended to nearly US$315/t … only to later fall to US$150/t. We will endeavour here to describe the factors that led to such dramatic movements and lessons for future expectations in the market.

Much work is done by analysts looking at the fundamentals of supply and demand to forecast trends, but the largest recent drivers of metallurgical coal price movements have been what are known as “black swans” – somewhat unpredictable shocks to the system. Extreme weather conditions have flooded mining pits, damaged transportation routes and interrupted loading activities at ports. Underground mines encountered unexpected difficult conditions that led to temporary outages and force majeure notices to customers. And a new factor appeared: the Chinese government imposing restrictions to the number of working days for domestic mines in an attempt to harness excess capacity.

Although these supply shocks cause major movements in prices and global seaborne demand, the examination of fundamentals provides a base level that the market should be drawn to approach. Similarly, in times of tight supply and skyrocketing prices, producers are drawn to bring on more production to capture strong profits. For these companies, a determination must be made as to the duration of the high prices and whether the environment is right to justify capital outlays for new mines and equipment or just a temptation that will shortly fade away.

QUEENSLAND FLOODS

The largest of these shocks over the past ten years have been caused by heavy rains in the Queensland mining region. The eastern portion of Australia typically experiences a wet season between December and March. Occasionally, these are more intense than usual, due to patterns of temperature changes in the Pacific Ocean. In 2008, heavy flooding in Queensland tightened supply by 15 Mt and drove annual contract prices from US$98/t in 2007 to US$300/t for 2008.