Metallurgical coal market observers say the first-quarter 2017 met coal benchmark settlement of $285/tonne could represent the top of the largely supply-driven market.
"I suspect that the peak has been reached," Doyle Trading Consultants CEO Hans Daniels told S&P Global Market Intelligence on Dec. 12. "With little demand growth and relatively weak global economic growth, this rally has originated solely from a supply deficit. With Chinese mining controls easing, new and expanded coking coal projects on the horizon, and mine outages resuming [production], rising coal prices will face a headwind barring an unforeseen event such as weather, strike, regulation, [or a] mine shutdown."
Among the new projects, Daniels listed the Acosta deep mine owned by Corsa Coal Corp., which is scheduled to begin production by the second quarter of 2017, and the $90 million that Ramaco Development LLC announced in September that it is investing to open mines in Central and Northern Appalachia. Daniels also said South32 Ltd. is scheduled to bring its Appin Area 9 longwall mine back online at the end of December. Production at the mine had been suspended due to elevated gas concentrations. Remedial work the company had expected to take a month followed the state-mandated suspension.
FBR & Co. analyst Lucas Pipes wrote in a Dec. 12 report that the benchmark settlement was above more recent investor expectations following a decline in a spot market that had peaked around $310/tonne around Nov. 22. Pipes wrote that the midpoint of expectations for the benchmark was about $275/tonne.
"While the benchmark was settled below what many bulls had hoped for, we see it as a price that is ultimately more supportive of a bullish narrative that the market continues to be tight with steelmakers willing to settle above spot prices," Pipes wrote.
Pipes agreed that current prices are not sustainable, but nonetheless highlighted factors that could support prices for longer.
"Australian capacity is by and large already fully utilized, U.S. mines remain undercapitalized, producers are cautious to pursue growth projects, and Chinese production [could re-rate] to a lower base level than prior to its industry restructuring initiative," Pipes wrote.