It should come as no surprise that the strength in iron ore prices due to China’s voracious appetite on the spot market this year is reflected in an equally strong coking coal market. Where thermal coal (used for power generation and heating) has risen just 25% from a March low of $60 per metric ton to $75 per metric ton and still way below last years record of $180 per metric ton, coking coal is a different story. The FT reports that spot prices have surged this week to $160 per metric ton up almost 40% in the last three months and the highest in a year. The spot price is now 24% above the price at which annual contracts we settled for 2009-2010. Indeed so strong is the market that this month Consol Energy shipped the first cargo of US coking coal to China in five years. Net imports of coking coal in China rose to 12.6m tons January to June this year up from 1.1m tons in the same period last year.
Chinese producers recognize that domestic supplies of coking coal are limited in scale and generally of poorer quality. For some time they have been trying to either develop Greenfield deposits or buy into established overseas miners. Just last week Yanzhou Coal Mining made a recommended cash offer for Felix Resources worth just over A$3.5bn (US$2.9bn). Felix produces both coking coal and thermal coal from mines in New South Wales and Queensland. Yanzhou already owns Auster coal in New South Wales and is treading very carefully with Australian regulatory authorities seeking approval for the Felix investment. Back in December when Yanzhou first expressed an interest, the shares were trading at just A$5/share, the current offer is at A$16.95/share, illustrating the value the Chinese place on securing long-term top quality coking coal reserves. And they are not alone, Arcelor Mittal is taking a 16% stake in Coal of Africa, a London listed coal producer with coking coal mines in the Limpopo province of South Africa. Mittal will take a minimum of 2.5m metric tons of coking coal with an option to increase this to 5m tons. The price is fixed to Rio Tinto’s Australian coking coal sales price.
Yet another investigation by the authorities in China into a mining accident illustrates some of the problems plaguing the domestic coal mining industry. The accident this week in Guangdong is reported to have cost 123 lives as an illegal mine flooded. A state broadcaster is reported as asking how the mine could have received a permit when anyone could see there was a reservoir above the mine. Greedy local officials who take a share of the mine profits are being blamed for a spate in accidents that has officially claimed 2,672 lives this year already (unofficially it is probably much more). China produces 33% of the world’s coal but has 80% of the world’s mining deaths. Coal production has nearly doubled to 2bn metric tons since 2000 with new smaller mines generating much of the new production. With two thirds of the country’s power being generated by coal and the booming steel industry creating strong prices, the country can neither afford to make sweeping closures of small mines nor deter entrepreneurs from new mining activities. In an environment with so much local corruption there is too much money to be made to enforce widespread closures or strict application of safety standards. As the China Daily said last week, owners are not interested in investing in safety equipment as it’s cheaper to pay compensation to the families of dead miners.