China may shake the global commodity market in the near term future since coking coal price, acting as the key ingredient for the steel manufacturing process has been rallying hard for the last couple of months. Due to the shortage of supply and ongoing increase in the demand for coking coal, the price of premium coking coal has surpluses $ 200 a ton over the last six weeks. Buyers among the different parts of the world are dissecting spot market in search of premium hard coking coal. According to the leading economic researchers in the China, the price of might rallies extensively in the near future since scarcity will be acting as the price driving catalyst in the spot market. If things continue to sustain like this then billions of dollars might be added as a profit to the industry’s biggest producers.
The extensive rise in the price is often known as “met coal mania” is due to strict restriction from the China government on the domestic coal miners. Previously they were allowed to work for 330 days which has been significantly reduced to 276 days a year causing the surge in price.
The strict initiative has been implemented by the Chinese government in order to boost their profit potential from coking coal production. This will help the coal industry to a great extent which will ultimately create a unique opportunity to repay their loans to the local banks from their cumulative profit. Though it will help the China’s economy to a great extent but the global market will be shattered significantly due to limited production of coking coal. The ongoing man-made coking coal crisis is pretty much prominent on the Aussie economy since they were one of the leading consumers of coking coal.
Big companies like Anglo American (LON:AAL), BHP Billiton (LON:BLT), South32 Ltd (MU:32Z) and Canadian Energy Services & Technology Corp (TO:CEU) might add billions of dollars of profit in their portfolio on the price surge of coking coal. This is one of the most important raw materials used in steel manufacturing process which have almost zero alternatives compared to its commercial price. According to the leading analyst of Jefferies, Christopher stated that the ongoing crisis is a perfect man-made crisis in the coking coal industry. Previously there had been a massive surplus in the supply chain which has been dramatically reduced in the market and the buyers are forced to pay the high price in order to fulfill their demand.
In the last year, there has been a sharp drop in the price of coking coal exceeding more than 30% loss but things are totally upside down in the year 2016.The price has significantly surged higher recovering their last year loss. The skyrocketing coking coal price has already erased previous year losses and 164 percent gain in the commodity market. According to Colin Hamilton, the head of commodities research at Macquarie said that “In bulk and base commodities if you get Chinese policy right you are a long way towards getting the market right”.
China stunned the whole financial market when their policy makers slowed their economic growth to a great extent in an orderly manner from the very beginning of the year 2016.This was one of the first step taken by the Chinese government in order to inject a huge amount of cash to their banking system. Initially, they boosted their construction activity in the local premises so that they get cheaper price of steel in their infrastructure development. Once they achieved stability in their local infrastructure they suddenly dimmed their coal production by limiting the working days of the local coal miners. The 276 – day policy had an initial effect of the price of thermal coal later it was transferred to the coking coal.
The 276 – day policy was not a sudden plan by the Chinese government rather it was one of the most advanced steps taken by them in order to achieve financial stability across the country. The price surge in coking coal was not noticeable until the month of July which flooded the Shanxi province. The natural disasters and the 276 – day policy had an extreme effect on the commodity market. Previously more than 300 m tons of seaborne coking coal was traded on contractual basis on each year but the strict policy dramatically reduced the production to 10 m tons resulting in such huge surge in coking coal price. This dramatic reduction in the coking coal from the production side increased the price from $ 100 to $ 200 a ton causing the recent rally in the price.
Ernie Thrasher, the chief executive of U.S coking coal producers stated that most of the recent buying has come from the steel mills in Europe and India. So it’s a clear fact that the buyers are acting more aggressively than the Chinese government as price tends to go high in every single day.
Summary: The Shanxi province has recovered to great extent after the flood and Tom Price, leading analyst at Morgan Stanley stated that there has been a request from the China’s National Development and Reform Commission for a short term lift in 276 –day policy in order to cap their thermal coal price for the production of electricity. And if the price remains more than$200 a ton for a prolonged period of time then it will also trigger the supply response for the Produces in North America. But to be precise the Chinese government is not yet ready to remove the restrictions of 276 –day policy and they will be rigid to their decision until they make a sizeable profit from the spot market.