In a bid to control pollution issues in China, Officials announced in April a limited number of statutory working days for coal miners. Low prices and a supply glut (at the time) saw working days cut from 330 days a year to 276 days. As usual… an unintended consequence from this has arisen. We are now seeing spot coal prices soar to mining boom levels, last seen 4 years ago.

Historically, Chinese mines have produced more than their planned capacity. Workers mine all year round to produce as much coal as possible. On top of this, bosses have skimped on safety considerations, and put workers’ lives at risk. However as China’s economy continues to transition from fixed asset investment led expansion (eg infrastructure & housing) to more consumer and services led, there has been less demand for both coking or metallurgical coal (used in steel making), as well as thermal coal (electricity). Prices plummeted on the reduction in demand and excess supply.

A confluence of factors recently has contributed to the rocketing commodity price. Demand for metallurgical coal has picked up as Chinese steel mills take advantage attractive steel margins.

Coal supply has been crimped from the April edict, as well as flooding in the Shanxi Province disrupting existing supply. Factors external to China have also affected supply. Big US producer Peabody Coal (which bought Australia’s Macarthur Coal), has buckled under the weight of debt and low prices, filing for Chapter 11. BHP’s spin out South32, has had problems with an Illawarra mine, having to declare a force majeure.

The question is now whether producers will see a genuine lift in contract prices (and demand), or whether this is just a short term aberration. Chinese officials have already suggested they will relax the 276 day rule in a bid to relieve the price.

In the meantime, our miners will no doubt make coal while the sun still shines, and coal producers like South32, Wesfarmers, Whitehaven and BHP will happily bask.