Brazilian mining major Vale believes that the market outlook for both metallurgical (or coking) and thermal coal for this year is significantly better than the market performance of the mineral for most of last year.

In the third quarter of last year (3Q16), the benchmark free-on-board (FOB) Australia prices for low volatility premium hard coking coal were $92/t. In the fourth quarter (4Q16), they jumped 116% to $200/t. Spot prices went from $133/t in 3Q16 to $262/t in 4Q16. The last quarter of last year also saw an improvement in thermal coal prices (see below), although Vale’s main focus is on coking coal.

“The coking coal price rally started in 2H16 (second half of 2016), when China’s supply side reform discouraged local coal production, mainly with restrictions on the number of days of mine operations, as demand for coal, an input for steel production, continued strong,” stated the company in its recently published report ‘Vale’s Performance in 2016’. “In the year, China’s coal production declined by 11% year-on-year, while its steel production increased by 1.2%. “To meet its needs for metallurgical coal, China resorted to the seaborne market, increasing its coking coal imports by nearly 24% year- on-year reaching 59.2-Mt (million tons), reversing the decline observed over the two preceding years.”

In September, because of the tightness of the market, China’s National Development and Reform Commission (NDRC), which also acts as a regulator, started easing the production controls it had earlier imposed. In mid-November, it ended the restriction which limited Chinese coal mine production to 276 days a year, allowing the country’s coal mines to operate for 330 days a year. The result was that local output of raw coal rose by 9.3% to 308-Mt in November (from 282-Mt in October) and prices started to fall. The NDRC has extended this policy until the end of this month (March). “Despite the price decrease at the end of 4Q16, the benchmark price for low-volatile hard coking coal was set at $285/t in 1Q17 (first quarter of 2017) and low volatile PCI (pulverised coal injection) settled at $180/t FOB Australia,” observed Vale.

Regarding thermal coal, at the start of 4Q16, the Richards Bay Thermal Coal Index was at $75/t, but by early November it had risen to $101/t. The average price for thermal coal during the fourth quarter went from $65/t to $85/t. This was underpinned by demand from China and disruptions in Indonesia caused by the weather.

Rising Chinese demand was the result of a 4.5% year-on-year increase in the country’s electricity output, which reached 5 911 TWh last year. Thermal power plants were responsible for 74.4% of this (4 396 TWh). Electricity production from these thermal plants was 2.6% higher year-on-year. On the other hand, thermal coal demand in Europe fell by 13% year-on-year, mainly as a result of the closure of coal-fired power plants in the UK. “The renewed [production] relaxation measure in China should allow the market to return to balance into 2017 and the thermal coal price to correct throughout the year.”