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Have Coking Coal Prices Run ahead of Their Fundamentals?

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Coking coal prices

Previously, we discussed the movement in iron ore prices. Coking coal or met coal is another key raw material used in steelmaking. Thermal coal is used in electricity generation. It has been on a terminal decline due to the global shift towards renewable and clean energy. Coking coal has also been on a falling trend amid saturation in the Chinese steel market.

However, met coal defied all of the pessimism. Spot prices have risen more than 130% this year. The rally in met coal prices has taken several market participants by surprise. However, more than any fundamental shift in coking coal’s dynamics, the cuts in Chinese capacity are helping prices.

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Cuts in Chinese capacity

In a bid to control pollution and curtail its excess industrial capacity, China reduced the work hours for workers in the coal sector (KOL). As the country’s coal output fell and demand from the steel industry increased, Chinese met coal imports increased this year. In the first seven months of the year, China’s coking coal imports have risen 11.3%—compared to the same period last year.

Teck Resources (TCK) is a leading player in the seaborne met coal market. It has gained more than 300% this year due to higher met coal and zinc prices. Other coal producers like BHP Billiton (BHP), South32 (SOUHY), and Rio Tinto (RIO) also stand to benefit from higher coal prices.

Outlook

In our view, met coal prices might have run ahead of its fundamentals. Some of the Chinese capacity might come back online after the big surge in prices. This could put pressure met coal prices.

Meanwhile, several US-based steel companies rely on steel scrap to produce steel. In the next part, we’ll look at the movement in steel scrap prices.

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