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Analysts: Met coal surge to continue into 2018 due to Chinese policy


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Analysts: Met coal surge to continue into 2018 due to Chinese policy

Metallurgical coal prices have jumped 165% since the startof the third quarter, and some analysts do not expect them to drop any timesoon.

"Chinese government policies on the global market willcontinue long after production volumes have recovered," wrote GoldmanSachs analysts Christian Lelong and Callum Bruce in a report dated Sept. 22entitled "Too many mines, not enough coal."

"The Chinese government may no longer be willing todeliver major demand shocks but its ability to surprise commodity markets isintact," the report also said.

Goldman increased its forecast for metallurgical coal pricesby 47% to 64% for 2017-2018.

"Met coal prices continued to rally in the run-up toprice negotiations for the next quarterly benchmark contract," the reportsaid.

The report also said supply reforms will help coal producersmoving forward. "The discipline of current supply-side reforms contrastswith the free-spending ways of previous years," the analysts wrote.

"The surplus of mining capacity still exists but itsimpact has been suddenly muted and the period of low prices and widespreadlosses has come to a premature end on the back of government intervention,"they wrote.

However, met coal could see a decline for the first time innearly two months as Asian steel markets demand less of the commodity,according to a Reuters report. The news agency cited sources in Australia thatnoted that cargoes of high quality coking coal sold for $190/tonne to $195/tonneFOB on Sept. 22 whereas spot prices sat around $206/tonne.

The Goldman report allowed that this rally may not continueas the Chinese government is likely to relax its current limit on yearly coalproduction to 276 days, calling it "unsustainable."

Lucas Pipes, an analyst with FBR & Co, said in a Sept.23 report that China is currently exploring efforts to balance "thecountry's broad economic interests with the mandate to reduce overall coalcapacity."

This has included offloading of shares of Canadianmetallurgical coal producer TeckResources Ltd.

He added that while met coal imports jumped in August, theywere still low in overall perspective. "We would highlight that Chinesemet coal production was reported to have declined by 33 million tonnes throughJuly, a much larger decline than the increase in imports," Pipes said.

However, a Bloomberg report citing anonymous sources saidthat the Chinese government had decided to increase production.

Most investors are expecting the upcoming benchmark price tosit on the lower side of $150/tonne to $190/tonne, according to the FBR report.