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Investors in European coal, the year's best-performing commodity, should strap in for a bumpy ride as demand for the fuel wanes.
Coal for delivery in Europe in 2017 will fall about 11 per cent by December, taking the gloss off the longest rally in year-ahead prices since 2010, according to a survey of traders and analysts by Bloomberg. The mineral's 48-per-cent jump this year is more than double crude oil's advance.
Coal-fired power generation in China, the biggest consumer, is forecast to fall 3.5 per cent this year just as supplies to Europe from the United States, Indonesia, Colombia and Russia rebound, according to energy consultants Perret Associates. In the European Union, new climate-protection policies will contribute to a 14-per-cent fall in coal demand in the seven years through 2020, International Energy Agency forecasts show. "This rally is seriously overdone," said Thomas Pugh, an analyst at Capital Economics in London, who expects coal for next year to drop to about $50 (U.S.) a tonne, or about 18 per cent below current rates. "The market should realize that demand is still very, very poor."
Coal for northwestern Europe in 2017 climbed to $61.60 a tonne earlier this month, the highest for a benchmark contract since March last year, according to ICE Futures Europe in London. It's poised for a fifth monthly increase, the longest run of gains in six years, and is outpacing the returns on commodity futures from natural gas to copper and corn.
Prices were helped this year by heavy rains that reduced shipments from Indonesia, the world's second-biggest coal exporter, and mining curbs in China that prompted demand for imports.
By the end of 2016, year-ahead coal will fall to $54 a tonne from the $60 range this week, according to the median estimate of seven traders and analysts surveyed by Bloomberg. The range of responses was $45 to $60.
The Newcastle thermal coal price, a benchmark in Asia, may average $58 a tonne next year, Citigroup Inc. analysts including Clarke Wilkins wrote in a July 25 report.
In Europe, coal's jump followed a 63-per-cent drop over the previous five years, a spiral that saw it slump to a rescord $36.50 in February. Analysts aren't forecasting a repeat of that plunge, which came amid "extreme pessimism" over falling demand in China and speculation that oil would decline to $20 a barrel, less than half the current price, said Andreas Speer, a commodity analyst at Bayerische Landesbank in Munich.
Trading is surging even after institutions including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. pledged to scale back support for coal projects in a bid to reduce the pollution blamed for global warming. European coal-trading volume in June jumped 89 per cent from a year earlier, according to Trayport Ltd., a London-based financial information provider.
"The production figures in China and Indonesia were coming down and buyers decided to jump into the market," Mr. Speer said.
In an effort to improve its environment, China curbed industrial production and cut its coal-mining output by 9.7 per cent in the six months through June, with production tumbling 17 per cent in that month alone from a year earlier. Indonesian coal exports dropped 32 per cent in the first half, the country's Energy and Mineral Resources Ministry data show.
"We were taken by surprise by the scale of the gain," said Guillaume Perret, director of Perret Associates. "The market overshot on the way down and now it's probably overshooting on the way up."