Top view of an excavator loading the truck with coal
Top view of an excavator loading the truck with coal agnormark

REVEALED: Why coal prices are likely to dive

INDUSTRY and political stakeholders will be watching coal prices nervously, following news a policy that drove them to record highs last year had been axed.

Last year China decided its coal miners would only be allowed to work 276 days a year, limiting world supply.

This caused metallurgical coal prices to leap from US$70/tonne in early 2016 to a five-year high at US$307/tonne by November, fuelling a resurgence in Bowen Basin fortunes.

The price spike was also the main reason almost $3b in royalties was expected to be funnelled to the State Government in the 2016-2017 year, twice as much as previously believed.

While the policy was relaxed for the Chinese winter, when more coal was needed for heating, commentators had believed it would be reinstated by March or April.

However, China has announced the policy won't be reinstated, allowing mines to continue producing large amounts of coal.

If the excess supply isn't matched with increased demand, prices will likely fall.

Given the news had already resulted in stocks in coal mining companies falling on the Australian Stock Exchange, Adept Economics principal Gene Tunny said "it means some of the exuberance seen about another resources boom are a bit premature".

While Mr Tunny said most analysts had predicted a fall in coal prices, he said the dumping of the policy could mean "they possibly would fall more than people previously expected".

This could frustrate governments hoping excess royalties would help them bankroll regional infrastructure projects, and win back votes from minority parties like One Nation.

Earlier this week, the Courier Mail reported on speculation Federal Government was debating how to spend "extra money expected from rising commodity prices", and touted a National Development Policy that could fund projects like a supercritical coal-fired power plant in North Queensland.

However, Mr Tunny said there "wasn't reason to panic yet".

"We'll just have to wait and see what the ultimate impact on the coal price is," he said.

Resource Industry Network director Mick Crowe said while the policy's axing would have an impact on coal prices, most mining companies would have factored that into their planning.

Rather, miners would turn their attention to factors they could control - like reducing costs.

And Paget's mining services companies, which saw business lift as mining companies spent extra cash on upgrades and improvements, could also only look for savings.

"The price will not go below the lowest cost of production, because people will say, 'I'm not going to sell it at that price'. When the (coal) prices come off the only thing that protects you is being a low cost producer," Mr Crowe said.

"Our long-term prosperity and our long-term confidence comes from being low cost producers and it just reminds us we need to stay focused on that."



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