The Global Price of Coal has Done a Hockey Stick

Source: SGX
Source: SGX

Guest essay by Eric Worrall

Coal, particularly “coking coal” used for smelting steel, has staged a tremendous comeback in the last few months, thanks to a large scale Chinese buying spree. The rise in coking coal in particular is dragging up the price of related products, such as iron ore. But what is driving this sudden surge in coal price?

Coking coal’s rally fires up iron ore

Chinese iron ore futures have surged 6 per cent to the highest in more than two years amid rising steel prices, playing catch-up with the strength in coking coal.

Firm steel demand in the world’s top consumer and producer and higher raw material costs are supporting prices of the commodity. A shortage in coking coal has driven prices higher, but iron ore is gradually keeping up.

The most-traded January iron ore on the Dalian Commodity Exchange climbed 6 per cent on Tuesday to hit the exchange-set ceiling of 471.50 yuan ($US70) a tonne, its loftiest since August 18, 2014. It is the biggest percentage gain since March 8.

The most-active January coking coal rose 4 per cent to a contract high of 1288 yuan a tonne. Coke soared as much as 5.9 per cent to 1662.50 yuan per tonne, the highest since December 5, 2013.

Read more: http://www.afr.com/markets/commodities/metals/coking-coals-rally-fires-up-iron-ore-20161025-gsa9yh

According to a story published the start of October, the price rise is so sudden it is seriously disrupting normal market pricing mechanisms.

CHART: Coking coal surge could kill quarterly pricing

The stunning rise in the price of coking coal shows now signs of reversing, and the nearly three-fold rise in the price of the steelmaking raw material since hitting multi-year lows in November last year has pushed the quarterly benchmarking system to breaking point.

Metallurgical coal was exchanging hands at $213.40 on Tuesday according to data provided by Steel Index as it consolidates at higher levels following weeks of panic buying not seen since 2011, when floods in key export region in Queensland saw the price touching to $335 a tonne.

Read more: http://www.mining.com/chart-coking-coal-surge-kill-quarterly-pricing/

What is driving this abrupt rise in the price of coal and iron ore?

Most pundits seem to assume the still ongoing Chinese housing and infrastructure boom is responsible.

Earlier this year I thought the price surge was simply a bout of tulip mania style market madness. China in particular seemed to be sitting on a very large stockpile of unprocessed iron ore.

But there is another explanation which, if correct, would neatly explain the recent global coal and iron ore price spike.

Both Donald Trump and Hillary Clinton have promised to spend 100s of billions of dollars over the next few years repairing America’s crumbling infrastructure. To the Chinese this must seem like a sure thing – they are simply positioning themselves to be the main supplier of raw materials for the coming US infrastructure boom.

EW: The US infrastructure explanation is speculative – please don’t bet your shirt on it, then blame me if your bet doesn’t work out.

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Griff
October 26, 2016 7:40 am

Chinese coal for power plants isn’t likely to increase though…
Here they just cancelled 30 large planned plants, equivalent to 17GW of capacity.
https://cleantechnica.com/2016/10/25/china-halts-construction-17-gw-coal-fired-plants/

Green Sand
Reply to  Griff
October 26, 2016 7:57 am

“Coal Plants Under Construction In China & India Rising At Alarming Levels”
https://notalotofpeopleknowthat.wordpress.com/2016/10/25/coal-plants-under-construction-in-china-india-rising-at-alarming-levels/
“….Thermal Coal power plants under construction continue to rise in China at alarming levels. The amount of plants under construction in China (205GW) and India (65GW) are the numbers to watch……”

AntonyIndia
Reply to  Green Sand
October 26, 2016 11:29 pm

IF you would be watching the factual existing numbers you would see such a big difference between China and India, and you would avoid this blind, traditional clubbing. It is as dumb as grouping the US with Russia because both are big in land mass, are in the Northern hemisphere and contain mostly Caucasian people.

ClimateOtter
Reply to  Griff
October 26, 2016 8:30 am

‘Here they just cancelled 30 large planned plants, which weren’t slated to be built for another few years anyway.’
There, fixed it for you. Plants scheduled for years from now don’t mean Squat against the dozens of plants going up right now.

vboring
Reply to  Griff
October 26, 2016 9:03 am

Coal plant capacity in China is entirely irrelevant. The existing fleet there has a ludicrously low 50% capacity factor, Compared to around 85% for similar plants in the rest of the world.
They could increase coal consumption by about 50% without building a single new plant if electricity demand increases.
If you’re wondering why they have so much excess capacity, the explanation is very similar to why they have empty cities. Central management is great at getting stuff done. It isn’t always great at deploying capital efficiently.

Editor
Reply to  vboring
October 26, 2016 9:12 am

According to the China Statistical Yearbook, utilisation of thermal plants last year was 55%
http://www.stats.gov.cn/tjsj/ndsj/2015/indexeh.htm
Capacity utilisation in China is generally much lower than elsewhere, even for wind and solar for a number of reasons, such as poor transmission networks, lack of maintenance and poor planning.
This does not mean that the new coal plants will not add to electricity output

Bryan A
Reply to  vboring
October 26, 2016 10:05 am

I believe that Part of China’s Excess Capacity is intended for resale to other countries that are falling short due to their own use of and dependence on renewables

Samuel C Cogar
Reply to  vboring
October 26, 2016 11:08 am

If you’re wondering why they have so much excess capacity,
One reason that I don’t wonder why, to wit:
The Three Gorges Dam has a generating capacity of 22,500 megawatts.

clipe
Reply to  vboring
October 26, 2016 4:56 pm

Too true,
In 1968, the main author of the proposed reform of the Czechoslovak socialist economy with a human face, Dr Ota Šik of Pilsen, found a mine and a coal power plant in the city of Ostrava such that the plant burned all the coal from the mine, and the mine consumed all the electricity produced by the power plant. A useful pair, indeed. 😉
http://motls.blogspot.com/2010/04/spain-produces-solar-energy-at-night.html

Griff
Reply to  vboring
October 27, 2016 12:54 am

Indian coal plant capacity recently has been around 65%.

Griff
Reply to  vboring
October 27, 2016 12:56 am

Bryan A – I don’t think so: China isn’t yet grid connected to other countries…. but it plans to be, to increase its use of renewables…
http://www.globaltimes.cn/content/891105.shtml
“With the connection of grid networks, the abundant solar and wind power resources in Central Asian countries – Kyrgyzstan, Tajikistan, Kazakhstan, Turkmenistan and Uzbekistan – could be transmitted to China through the ultra-high voltage (UHV) technology, and these countries can benefit from the rise in investment and economic gains, Shu said.”

MarkW
Reply to  vboring
October 27, 2016 8:45 am

“Indian coal plant capacity recently has been around 65%.”
Which would explain why they are slowing down the building of new plants.

MarkW
Reply to  Griff
October 26, 2016 11:27 am

Their rate of economic growth has slowed way down. As a result, plants that aren’t going to be needed anyway are being cancelled.
This has been explained to you over and over again.

AndyG55
Reply to  Griff
October 26, 2016 1:07 pm

China is just balancing what they already have against what the currently need. They have overbuilt at this time.
Don’t worry Griff, China, India and several other countries will be EXPANDING their coal/gas fired electricity fleet for many years to come, so there will continue to be increased emissions of CO2 for as long, long time into the future.
Increasing atmospheric CO2 for the world’s plant life is guaranteed.
And guess what, Griff, there is absolutely NOTHING you and your fellow anti-CO2, anti-LIFE scammers can do about it. 🙂
So… BE HAPPY !! 🙂

Griff
Reply to  AndyG55
October 27, 2016 12:58 am

India is certainly massively expanding its renewables – well on course for its 175GW target for 2022. The cost of new solar is well below fossil fuel in India already…
I think you need to look at what’s happening on the ground.

toorightmate
Reply to  Griff
October 26, 2016 1:44 pm

As you read this garbage, the volume of coal being shipped into China continues to increase and coal mining productivity in China continues top improve.
Same is happening in India.
However, the left wing media seems content to report data which is blatantly incorrect.

Griff
Reply to  toorightmate
October 27, 2016 1:00 am

India will ban coal imports by 2020…
http://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/india-to-stop-thermal-coal-imports-save-rs-40000-crore/articleshow/51839241.cms
Yes, it is increasing domestic production, but also replacing coal use with reenwables.

gregfreemyer
Reply to  toorightmate
October 27, 2016 7:56 am

>> Yes, it is increasing domestic production, but also replacing coal use with reenwables.
Like natural gas? They have said they plan to import a massive amount of LNG in the next decade and significantly increase the share of energy from natural gas. By 2020, the US might be exporting 10% of its natural gas production as LNG.
And natural gas is renewable. Drill a hole. Frack it. When you run out of gas, frack it again. Gas supply from that well renewed.
It’s interesting that in the US the drilling rig utilization is down around 20%, but the fracking engine utilization is around 70%. I can only assume there is lots of re-fracking going on.

Paul Westhaver
October 26, 2016 7:48 am

Coke demands due to steel demands indicate a rising economy? All commodities will rise, copper, wood, silver,OIL. Are you suggesting that the Obama recession of negative growth is over?

Resourceguy
Reply to  Paul Westhaver
October 26, 2016 8:18 am

No, but the policy will to cut back on industrial overcapacity in China is gone.

Mark from the Midwest
October 26, 2016 7:49 am

This type of thing has happened before, the good news is that it doesn’t seem to impact long-term contracts. Shortly before the Beijing Olympics China was stock-piling diesel and fuel oil, the near term contracts went crazy, but once China had a strategic reserve they backed-down to replacement buying. They’re actually pretty smart about developing these reserves, they jump into the market, big time, before others can react. I’m sure the Chinese aren’t paying the near-term contract price, they’ve just forced everyone else to pay it. I won’t be surprised to see it happen again for other resources.

Rob
Reply to  Mark from the Midwest
October 26, 2016 3:30 pm

This is similar to what the Chinese did with phosphate fertiliser as well. Because they act at the entire national level , they become the single largest player in the market and move prices by themselves.

TA
October 26, 2016 8:26 am

“But there is another explanation which, if correct, would neatly explain the recent global coal and iron ore price spike.
Both Donald Trump and Hillary Clinton have promised to spend 100s of billions of dollars over the next few years repairing America’s crumbling infrastructure. To the Chinese this must seem like a sure thing – they are simply positioning themselves to be the main supplier of raw materials for the coming US infrastructure boom.”
My guess is if Trump gets elected he will want American companies to reap the most benefits from any infrastructure project. I know that’s what the American people want.

commieBob
Reply to  TA
October 26, 2016 8:47 am

My guess is if Trump gets elected he will want American companies to reap the most benefits from any infrastructure project. I know that’s what the American people want.

I fully agree. My worry is that trade agreements will prevent us from favouring our own industry and workers.
The Chinese want to send their cheap workers over to Canada to work in Chinese owned mills and mines. No Canadians need apply. link Trudeau Junior seems to think that’s a good thing.

TRM
Reply to  commieBob
October 26, 2016 10:04 am

We had all hoped that Justin would get his dad’s brains and his mom’s looks but it appears he got everything from mommy. We are so screwed 🙁

commieBob
Reply to  commieBob
October 26, 2016 10:57 am

We are so screwed 🙁

Have a care for your poor American cousins who are screwed way worse*. At least Trudeau Junior supports some pipelines.
*Unless Hillary starts WW3, in which case everyone is in the same boat.

MarkW
Reply to  commieBob
October 26, 2016 11:30 am

When American companies are forced to pay more than the world price for raw materials, exports become even more uncompetitive. Which in turn forces even more US companies to quit the US, or go out of business.

MarkW
Reply to  TA
October 26, 2016 11:29 am

So Americans should pay more than the world price for products, so that politicians can feel good about themselves?

commieBob
Reply to  MarkW
October 26, 2016 10:53 pm

Do you think Americans should work for Chinese wages? What about the balance of payments?

MarkW
Reply to  MarkW
October 27, 2016 8:48 am

They won’t. Over time everyone’s wage will approach their productivity.
The reason why Chinese workers are paid so little is because their productivity is so low. As China improves it’s economy, productivity and wages will increase.
It’s what happened every single country that you doomsters claimed would destroy US wages.
The balance of payments problem is caused by the budget deficit. Foreigners are buying US debt instead of US products.
Until the budget is balanced, the balance of payments problem can’t be solved.
Once the budget is balanced, the balance of payments problem will solve itself.
Trying to fix the balance of payments problem while we still have a budget deficit is an exercise in futility.

Samuel C Cogar
Reply to  TA
October 27, 2016 5:15 am

TA saidith: “and Hillary Clinton has promised to
Shur nuff she did and ………….
Do ya wanna know why Hillary Clinton made a political stop in Appalachia (WV) for the sole purpose of promising the lefty liberal Reporters and her lefty liberal “greenie” wacko supporters that if she is elected POTUS the 1st thing that she was going to do would be to “close down all coal mining operations” …… and …. “put all the coal miners out of work”?
Read this and you will for sure know “why”, to wit:

More than one-third (1/3) of the coal produced in the United States comes from the Appalachian Coal Region. West Virginia is the largest coal-producing State in the region, and the second largest coal-producing State in the United States. Coal mined in the Appalachian coal region is primarily used for steam generation for electricity, metal production, and for export.
Read more @ https://wvcoalassociation.wordpress.com/news-comment/coal-mining-101/

kim
October 26, 2016 8:42 am

Also, China cut their coalworkers to a 5 day week, from, I think, a 6 day week. This cut their domestic production.
Another also, I don’t think they have much metallurgical(coking) coal.
============

Editor
Reply to  kim
October 26, 2016 1:14 pm

I think it may be correct – that China’s coal is mostly younger and lower quality, and the high prices are principally for the higher quality metallurgical (coking) coal. By cutting back on their own production and expanding imports, the chinese aim is to improve the quality of the coal they use and hence produce steel more efficiently. Also, they can rationalise an inefficient industry (coal mining) and cut pollution. They have presumably worked out that a higher price is worth paying.
NB. I’m not sure about this, others may provide better explanations.

TJ Pilgrim
October 26, 2016 9:33 am

most FED and state funded infrastructure projects spec out Domestic steel for construction

Terry Warner
October 26, 2016 10:03 am

Nothing to do with fundamental supply and demand issues. Strongly suspect a speculative bubble driven by smart money cornering the market and creating a crisis through forward contracts.

les
October 26, 2016 10:27 am

An article last week (can’t remember where I read it) detailed the concern of mining companies that the spike in prices would not last and went on to detail just why it had happened. If memory serves, the Chinese government had ordered a cut back domestic coal production by something in the range of 20-30% . The reasons they gave by way of explanation for that action did not make much sense, but then making sense of government action has proven to be a particularly fruitless endeavor, irrespective of whose government it is.

Reply to  les
October 26, 2016 1:42 pm

See my comment below. It was 27% starting in February. Intent was to firm thermal coal prices so the bloated coal mining sectormcould start to earn enough to pay down its bloated debts. The aim was thermal coal, which is more than 90% of all Chinese coal production. Coking coal hit was an apparently unintended side effect tomyhemmuch smaller market thatnwas already running almost 10% imports before the mandated supply reduction.

October 26, 2016 10:43 am

China is preparing to build a new 770 kilometres of railway track between Moscow and Tatarstan capital Kazan.

October 26, 2016 11:53 am

No.
Only the metallurgical coal has seen a recent price increase. That coal is approximately one-eighth of world production tonnage. (983 million of 7.8 billion tons per year, approximately)
Thermal coal for electric power plants continues its low price and therefore scarcity.
WUWT readers may want to read this metallurgical coal assessment from 2013; it contains facts. In particular, pages 19 and 20 with recent price history.
http://www.abmbrasil.com.br/cim/download/Luiz%2520fernando.pdf

Reply to  Roger Sowell
October 26, 2016 12:02 pm

This link may work better:
http://www.abmbrasil.com.br/cim/download/Luiz%20fernando.pdf
“World Market for Metallurgical Coal”,
Sarcinelli Garcia, de Faria, (2013)

lokenbr
Reply to  Roger Sowell
October 26, 2016 12:49 pm

Yes Roger – thanks – a number of commenters seem to lack an understanding of the difference between coking coal (used for steelmaking – and the subject of our “hockey stick”), and thermal coal which is used in power production.

D. J. Hawkins
Reply to  Roger Sowell
October 26, 2016 3:56 pm

You can also go here:
http://www.infomine.com/investment/metal-prices/coal/
for maket prices on thermal coal back to 15 years. It’s running about $40/ton recently, but was lower back around ’02.

gregfreemyer
Reply to  Roger Sowell
October 27, 2016 8:08 am

I’m a bit confused. From a few weeks ago:
http://uk.reuters.com/article/australia-economy-coal-idUKL4N1CI08E
==
In just the past three months spot prices for thermal coal have climbed 40 percent, while coking coal is up 130 percent. That is a boon for Australia where coal accounts for a tenth of exports at around A$2.8 billion ($2.12 billion) every month.
==
I don’t see that 40% increase for thermal coal in the discussion / links here? It may not be the hockeystick that coking coal is, but it sure isn’t trivial either.

October 26, 2016 12:08 pm

Boy, that investment in coal by George Soros sure is becoming profitable!

Caspian
Reply to  micro6500
October 26, 2016 5:09 pm

Actually thermal coal is way up as well – term is at~$75 (from $40 earlier this year) and spot is in the high $90s!

October 26, 2016 1:36 pm

Nothing magical here. In Feb China ordered a reduction in working days at all coal mines from 330 to 276, or 27%. This was to reduce bloated oversupply from domestic coal miners, firm prices, so they could start to repay bloated debts. Was intended mainly for thermal coal, as China was already short and importing 3 million tons of coking coal per month, about 9% of annual coking coal consumption. This met coal cutback caused China to have to more than double monthly met coal imports in less than 6 months. That caused a spot market scramble. Financial Times has a good article explaining the unintended consequences of this top down economic diktat.

pd2413
Reply to  ristvan
October 27, 2016 7:52 am

Exactly this. The price is up because China has limited it’s coal mining activities. It’s like the author saw the price was up and just guessed at a couple reasons why without looking into it.

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