Coking coal volatility is off the cards, with prices likely to remain high after recent rallies, Goldman Sachs believe.
China’s recent plans to dramatically slash its coal output by reducing its mining and steel sectors has driven metallurgical coal’s price through the roof, seeing the spot price double to more than US$205 per tonne.
In January it declared it would not approve any new coal mines for the next three years, in a bid to cut growing stockpiles, as well as increase its alternative energy supplies.
The country also plans to reduce national output by around 60 million tons in 2016, and around 500 million tonnes of coal over the next three to five years, with the Shanxi province slashing around 100 million tonnes of production alone by 2020.
In March China’s government then stated it would lay off close to two million workers in its coal and steel industry to help cut market oversupply.
An official at China’s human resources and social security ministry said the nation’s industries expect to cut around 1.8 million workers as it seeks to reduce capacity, and address the growing stockpiles in the country.
This plan to slash the country’s coal and steel workforce came only days after Chinese coal companies pushed the government to set a price floor for coal to protect against bankruptcy and stem job cuts.
Additionally, the government has taken further steps to reduce output, cutting operating days from 330 to 276 per year.
The country’s decision first began to make an impact in May this year, with early forecasts of a minimum 20 per cent increase in coking coal prices.
China’s continued action has made investment banks and funds even more bullish on coal’s future, with recent Goldman Sachs notes raising the 2017 contract prices forecast by 64 per cent to US$135 per tonne and its 2018 estimates by 47 per cent to US$125 per tonne; this is extremely bullish compared to current third quarter prices of US$92.50, according to Bloomberg.
The note explained the changes come on the back of a different operating environment.
“We see upside risks if current policies remain unchanged going into next year and the resulting shortage overwhelms the ability of producers in Australia and the U.S. to respond,” Goldman Sachs stated.
Macquarie Group also followed suit, raising its fourth quarter predictions by 84 per cent, and 2017 first quarter forecast by 56 per cent.