(Bloomberg) -- China’s drive to reduce overcapacity and streamline its coal industry has sent prices of the bulk commodity soaring. Efforts initially aimed at reversing a four-year collapse and help miners repay debts have pushed coal higher and faster than anyone anticipated. The fuel burned in power stations has doubled, while the coal used in steel making has more than tripled. The boom has also turned mining companies from some of the worst performing stocks into the best.
China went big on the production cuts earlier this year, causing output from the world’s largest miner to drop 11 percent in the first nine months. It also trimmed 150 million metric tons of overcapacity by the end of August -- more than Russia’s entire thermal coal exports last year -- and is targeting 500 million tons by the end of the decade. For the time being, the cuts appear to have stopped, with output in September up 5 percent from its May low.
A look at China’s ports, mines and power plants show the impact of the aggressive policy this year. Inventories dropped for eight consecutive months through August to the lowest level since 2008. That left electricity generators in a precarious position as they stockpile coal ahead of winter, which is forecast to be the coldest in four years. Power generators and steel makers have turned to the overseas market to top up supplies, boosting imports 15 percent over the first ninth months.
China is now scrambling to reverse the rally, with regulators calling the surge “irrational” and meeting miners regularly to hash out ways to stabilize prices without backtracking on the original goal of permanently erasing the glut. Certain “advanced” producers have been called on to boost output before winter. China Shenhua Energy Co., the country’s biggest, sees thermal coal prices pulling back from current levels as the efforts take effect. Qinhuangdao coal climbed to 672 yuan ($99) a ton through the week ended Oct. 31, the highest since 2012.
Stockpiles at Qinhuangdao, the main import point for the fuel, have rebounded from the lows of September. And regulators this week have said some coal miners are cutting spot prices, signaling the tightness is easing. There may be potential correction in prices before end of January, Goldman Sachs Group Inc. analysts said in a report this week.
While the price rally has helped to boost shares in miners from Indonesia’s PT Adaro Energy to Teck Resources Ltd., producers remain cautious on the outlook. BHP Billiton Ltd., the world’s biggest shipper of coking coal, used in steel making, said current prices are not sustainable. Even though Glencore Plc plans to reopen the Integra metallurgical coal mine in Australia next year, the company said the project’s output is not expected to boost its overall sales.
Mitsubishi Corp. and Mitsui & Co., Japan’s biggest trading companies, predict coking coal prices will decline after the surge helped to boost their profits. RBC Capital Markets estimates seaborne coking coal will average $165 a ton next year, easing almost 40 percent from current levels.
With assistance from Ben Sharples, Jing Yang