HONG KONG – Coal’s making a comeback after five years in the doldrums.

Power-station coal has surged this year, outpacing both oil and natural gas, as China’s efforts to reduce mining capacity boosts domestic prices and increases the appetite for seaborne imports, according to UBS Group and Australia & New Zealand Banking Group. The steel-making variety of coal is at the highest in more than a year, further supported by robust Chinese steel output.

Coal’s decline began in 2011 amid a global glut, then deepened as China slowed overseas purchases. Efforts this year to reduce the country’s output have boosted domestic thermal coal prices and spurred a revival in imports after they slumped in February to the lowest since 2011. While shipments eased in July amid a wider drop in energy imports, they remained above 21-million tons for a second month and near the most since December 2014.

“There’s been a positive impact on the seaborne thermal market from the continuing closure of capacity in China,” said Daniel Hynes, senior commodity strategist at Australia & New Zealand Banking Group in Sydney.

“Prices will probably remain around these levels, or even push higher, if imports continue to climb. The macro data is stabilising, which does suggest that industrial demand for coal-fired power should hold up relatively well.”

CAPACITY CUTS
Newcastle thermal coal, an Asian benchmark, is up more than 30% this year and reached as high as $67.07 a metric ton in the week ended August 5, according to data from Globalcoal. Prices are on track to snap a five-year streak of declines. Metallurgical coal advanced almost 35 percent this year to $105.40, the highest since March 2015, according to data from The Steel Index.

Prices are still far from recent highs. Metallurgical coal hit a peak of about $300/t in 2008, when flooding in Australia curbed output. Thermal coal at the time rose to almost $195.

While the coal glut has disappeared and Citigroup predicts growing deficits for both thermal and metallurgical in 2017, oil and gas markets are each contending with surpluses. Brent crude prices are up about 24% so far in 2016, while US natural gas has gained roughly 8%.

China is seeking to cut as much as 500-million tons of production capacity by 2020, equivalent to about 9% of its total, as the country seeks to trim industrial oversupply and curb pollution, the nation’s State Council said in February. Coal output fell 2.7% in July from the previous month to 270-million tons, according to data Friday from the National Bureau of Statistics. Output is down 10% during the first seven months of the year.

Authorities have cautioned that mines are shutting too slow to meet year-end targets. Reductions during the first seven months of 2016 equalled about 95-million tons, or roughly 38% of this year’s goal, according to a statement posted online Thursday by the National Development and Reform Commission, the country’s top planner.

STEEL OUTPUT
China’s increased appetite for imports is a boon for miners from Glencore to BHP Billiton, the world’s biggest shipper of metallurgical coal. They were among companies to shut operations, halt development projects and cut jobs as falling prices squeezed margins. Chinese steel output reached a record daily volume in June as mills in the world’s top producer boosted supply to take advantage of rebounding prices.

Imports will likely ease in the coming months as peak summer power consumption starts to fade, said Guo Chaohui, an analyst at Beijing-based China International Capital. Demand for seaborne coal in the long term will depend on whether the government decides to relax its efforts to trim capacity after the recent price gains, he said. China enacted a raft of policies in 2014, including higher quality specifications and import restrictions, to protect domestic suppliers.

“The import number underlines what’s been behind price strength in seaborne markets,” said Daniel Morgan, an analyst with UBS Group in Sydney. “I don’t think this lift in imports is sustainable and coal prices will probably ease somewhat from here, but not hugely. Steel production in China has also been running higher than most had expected this year and that’s boosting the iron ore and met-coal markets.”