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Coking coal groups wait on supply clues from Beijing

For a coking coal industry that enjoyed bumper profits last year off the back of a price rally that made it 2016’s best performing big commodity, Teck Resources’s chief executive summed up the industry’s uneasy reliance on policymakers in Beijing.

“I think on Chinese policy, we could go around the table and everyone would have a different opinion on that one,” Don Lindsay told analysts after reporting record fourth-quarter earnings this week. “We’re just going to have to wait until we see what the policy shakes out.”

Shares in Teck Resources and fellow coking coal producer South32 fell this week despite both companies reporting better than expected profits. The slide partly reflected uncertainty over whether coal production restrictions would be reimposed in China as it comes to the end of its winter heating season in March.

What China does will determine prices this year for coking coal, which is used primarily in blast-furnace steel production. It will also be a test of how determined Beijing is to continue cutting supply capacity and reducing air pollution.

Coking coal prices surged almost 300 per cent last year to a peak of more than $300 a tonne in November after Beijing cut the number of days coal miners could work in a year to 276 from 330. But prices have fallen by almost half in the past three months since those policies were relaxed over the winter.

Now some analysts speculate that curbs could be reinstated in March, although it is unclear if restrictions would apply to all coal mines. Analysts at Citi said Chinese regulators were expected to continue to allow high-grade coking coal mines to operate for 330 days while cutting back other mines to 276 days.

Such a move could reflect China’s twin ambitions of cutting smaller mine capacity while also trying to maintain coal prices within a certain band — high enough to avoid bankrupting the country’s coal sector but not so high as to hurt Chinese industry.

Mr Lindsay said he had heard “some indications” China could go back to 276 days a year but that is was “unclear whether that is for everybody or certain mines with safety ratings”.

Shares in Teck fell 10 per cent on Wednesday after forecasts for a lower projected coal sale price overshadowed a return to profitability in its fourth-quarter results.

Chinese policy will also affect imports. If the government continues to allow high-quality domestic supply, that could reduce its price compared with imports from overseas producers. Coking coal prices in China are trading about $45 a tonne higher than Australian ones, according to Platts.

Graham Kerr, chief executive of South32, a spin-off from BHP Billiton that produces coking coal from Australia’s Illawarra region, said that in a year of the Communist party congress China would want stable prices and to cut pollution by curbing output of lower-quality coking coal.

Along with a continuation in fiscal stimulus, that would keep the market “tight” for the rest of the year, he said.

In the near-term, the coking coal market still had to work through inventory after customers in China purchased more than expected at the end of last year in anticipation of weather-induced supply disruptions that did not materialise, said Edwin Yeo, an analyst at Platts in Singapore.

While buying had picked up, it was largely because prices have been lowered to clear the overhang. “There’s too much supply out there,” Mr Yeo said. “Steelmakers are buying because the prices are so cheap.”

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