LONDON: Thermal coal is expected to retain much of the price gains made last year as it continues to be one of the best performing commodities, driven by Chinese policies to reduce coal output and thereby oversupply, analysts and traders said.
After half a decade of decline, the value of thermal coal prices have soared from a year ago.
The Australian thermal coal price, the Asian benchmark, has grown by two thirds since last January to $84 a tonne, driven by a sharp cut in Chinese coal mining and strong demand.
Prices are likely to continue to trade in a roughly $70-80 a tonne range this year but are unlikely to hit over $100 again like last October, analysts and traders say. "Most of it depends on China.
If the output cap is relaxed somewhat, then its imports could start to drop - prices back around $60 or $70 do seem a bit more sustainable for the year than those way up at $80 or $90," said Trevor Sikorski, head of natural gas and carbon at consultancy Energy Aspects.
"I don't think we would see returns back to sub-$60 unless China really just abolished mine output caps altogether - which I don't think they will do," he added.
A Reuters poll of analysts last December forecast an average Australian thermal coal price of $70.6 a tonne in 2017, up from the previous forecast last September of a 2017 average of $53.6 a tonne.
As a sign that China will likely stick to strict cuts and is betting on higher coal prices, Chinese government-controlled Yancoal Australia Ltd last week agreed to buy Rio Tinto's Australian unit Coal & Allied Industries for up to $2.45 billion in cash.
Analysts and mining executives expect the Chinese government to order mines to reduce output again soon, likely after Lunar New Year festivities.
China might take a softer approach initially than when it limited mines' working days last April to cut inefficient surplus, as prices spiked and it was forced to relax the policy to avert a winter energy crisis.
However, limits could start ramping up again when the peak heating demand wanes.
"Again, much depends on the Chinese.
Their policy amendments will once again be a driver for prices across the globe," said Wayne Bryan, analyst at Alfa Energy.
"The intention to cut 500 million tonnes of coal capacity by 2020 is ambitious but achievable," he added. China has already cut more than 315 million tonnes of coal production capacity, according to a Reuters review of provincial data, and has pledged to cut another 250 million this year alone.
Many ageing operations are being replaced with cleaner facilities, however.
Consultancy Wood MacKenzie says as much as 1.5 billion tonnes of new and expanded capacity will come online in the next two years.
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