October 18, 2016 / 7:40 AM / a year ago

Coal: after the boom comes the bust?

* Australian thermal coal price curve: tmsnrt.rs/2ebnznn

* China coal futures forward curve: tmsnrt.rs/2ebqQTL

* Top-3 Australian coal price rallies: tmsnrt.rs/2e2XFpc

By Henning Gloystein and Keith Wallis

SINGAPORE, Oct 18 (Reuters) - The thermal coal price rally is now among the commodity’s top-3 bull-runs on record, rivalling the 2011 Fukushima nuclear meltown and Australian mining flood spike, and the 2008/09 financial boom and bust.

With Australian Newcastle spot cargo prices up over 90 percent since June and up almost 100 percent this year at almost $100 per tonne, traders and analysts say a bust is inevitable but maybe not just yet.

“Of course it’s not going to last. Rising prices are encouraging Chinese miners to raise output and the government, seeing how much prices have risen, has backed down somewhat and asked for an increase in production,” said Ralph Leszczynski of shipping brokerage Banchero Costa.

However, many believe prices could keep rising until the end of the year or possibly into early 2017 as the winter season fuels demand and miners take time to bring on more production.

The price rally for thermal coal, used to generate electricity, was triggered by a Chinese government decision to cap its mining output, aimed at reining in rampant overcapacity, and which forced its utilities to import more coal.

The intervention cut China’s mining output by around 15 percent “and sent consumers - electricity generators and steel mills - back to global markets to meet the short-fall,” said Gerard Burg, senior economist at National Australia Group.

He does not expect current prices to last “too much longer” as Chinese authorities urge miners to raise output again to control spiralling coal prices.

International exporters are also reacting to the higher prices, with Glencore last week announcing it will hire more than 200 workers at its Collinsville coal mine in Australia, which mostly exports thermal coal.

FOR NOW, IT‘S RED HOT

Vertical price jumps tend to be followed by sharp downward corrections, yet many analysts believe the coming downturn will be more gradual than the rally that preceded it.

“Increasing production comes with a lag as you need to re-hire workers, do training etc,” said Leszczynski.

China and other big importers like South Korea are also short of supplies ahead of winter, which many forecasters expect to be colder than the last two.

Traders also pointed to big price rises for metallurgical coal, which has been hit by outages in Australia. This has also affected thermal coal since both coals tend to come from the same mines.

“There’s a perfect storm in coal markets. Metallurgical coal is red hot, due to outages in Australia and - like in thermal coal - because of soaring Chinese imports,” said a mining investment advisor in Singapore, who spoke anonymously due to the price sensitivity of the matter to his clients.

A somewhat gradual price retreat is mirrored in the forward curve, where Chinese coal futures show a price fall from $85.30 per tonne for November to $71 by April next year, and to $61.15 a tonne in October 2017.

Forward contracts show how much traders are willing to pay today for a product to be delivered at a later stage.

Utilities using coal to generate electricity are already preparing accordingly: a source at a South Korean utility said it was only a matter of time before spot coal hit $100 per tonne. Only then, he said, would prices taper off.

He was therefore trying to avoid the spot market and instead “seeking to buy cargoes for next year’s third and fourth quarters.”

Newcastle coal cargo prices for the third quarter of 2017 are currently priced around $73.25 per tonne, $22.75 below current spot cargo prices.

Reporting by Henning Gloystein; Additional reporting by Keith Wallis in SINGAPORE and Jane Chung in SEOUL; Editing by Richard Pullin

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