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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Chinese Government Intervention Could Kill The Coal Rally

Coal has gone from black sheep to red hot over the last month. With soaring prices prompting a sudden burst of optimism amongst miners globally.

Glencore, for instance, said this week it plans to reopen its Integra coal mine in southeastern Australia next year. Coming just days after the firm restarted output from its Collinsville mine in Queensland.

New supply coming online like this is a concern for prices. But an even bigger threat has emerged the last few days for this rallying market — in the world’s number-one coal consuming nation, China.

The South China Morning Post reported Monday that Chinese officials are worried about the recent strength in coal prices — with local costs for coal consumers having risen as much as 50% since the end of June.

And the Chinese government is asking producers to do something about it.

Coal mining companies across the country were reportedly called to an emergency meeting late last week by high-profile regulatory body the National Development and Reform Commission (NDRC). Where the Commission asked that they prevent any further rises in coal prices for the coming year.

Attendees at the meeting said that the NDRC asked producers to fix long-term 2017 prices at or below current spot levels. With the government citing concern about rapidly rising costs for residential energy users. Related: Saudi Aramco’s Chief Sees Oil Rebounding In H1 2017

Such a move to cap prices would be a major dent in the current coal rally. Domestic supply in China would suddenly be very cheap on a global scale, likely discouraging imports of more-expensive foreign coal — and probably stunting further price appreciation.

The development also shows the turmoil in China’s coal sector right now. With supply reeling after the government moved this past year to close small mines across the country.

That makes the outcome hard to predict here. On the one hand, high prices are needed to incentivize producers — yet the government seems unwilling to allow rates to move higher. Watch for the response from producers to the NDRC request, and the ensuing action in Chinese and global coal prices.

Here’s to putting a lid on it.

By Dave Forest

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