Coal price set to fall over the next two years

Newcastle coal prices hit a five-year high in November, climbing from US$49/t at the start of 2016 to US$115/t in November, but fell quickly to their current level of US$80/t. The main driver in these fluctuations is China’s supply management policy rather than the new administration in the US. The Chinese government has cut coal production to boost prices and safeguard coal mining jobs. However, as the country eased supply restrictions in response to increasing prices but temporary, safety check-related closures in February have resulted in prices rising again.

However, uncertainty is not only caused by Chinese policies. Australia, Colombia and Indonesia are all restarting output as they respond to increasing price levels. Moreover, seaborne demand from India to Europe is also falling as prices are rising. In the US, lower seaborne prices could in turn put pressure on Appalachian prices. However, higher natural gas prices in the US are expected to support PRB coal in the Rockies, according to Bank of America Merrill Lynch (BoAML).

These factors indicate coal prices may fall in 2017. Newcastle coal prices are expected to trade sequentially lower in 2017 and beyond, averaging US$80/t in 2017 and decreasing further to US$64/t in 2019, says BoAML.