Futures markets point to 'overcooked' coking coal price

Metallurgical coal was exchanging hands at $213.40 on Tuesday according to data provided by Steel Index, where it has been most of this week as Chinese traders enjoy the annual Golden Week holiday.

The nearly three-fold rise in the spot price of coal used in steelmaking since hitting multi-year lows in November last year has upended price setting in the industry.

Third quarter contracts were signed for double digit prices per tonne at the end of June and the disconnect could well be the final nail in the quarterly benchmarking system for the raw material as Japanese, Indian and Chinese steelmakers enter some tough negotiations with Australian producers.

Most of the panic buying did not come from China, but from mills in Europe and India

Futures markets point to 'overcooked' coking coal price

Source: The Steel Index

Futures markets point to 'overcooked' coking coal price

Source: The Steel Index

The still underdeveloped derivates market is pointing in different direction altogether – a sharp correction that would wipe out much of the insane gains of the past couple of months. The Steel Index, a unit of Platts, coking coal review notes that on October 5, Premium Hard FOB Australia coking coal forward curve was backwardated out to the end of 2017 (see chart).

The report says given the surge in the coking coal price since the beginning of the year, the market remains divided on future direction, with some feeling that prices are “overcooked” and that it would correct itself in due time, while others felt that the bull run will continue due to persistent tightness in coal supply.

Chinese participants returning to their desks after Golden Week should give new direction to spot prices on Monday.

Or maybe not.

US coal legend Ernie Thrasher told the Financial Times that most of the panic buying did not come from China, but from mills in Europe and India:

“They realised they needed coal but the market had started to run away from them,” he said, adding: “Buyers tend to be much more reactive when the price goes against them.”

Perhaps the clearest indication of where prices may be headed also comes from Thrasher.

The CEO and founder of Xcoal Energy & Resources, the largest exporter of coal in the United States, is said to be in exclusive talks to acquire Anglo American's Australian met coal mines, making a $1 billion bet on the outlook for the market.