“We are upgrading our 2010 metallurgical coal forecast to $US140 per tonne for premium hard coking coal, with smaller rises for the other metallurgical coal qualities,” Macquarie said in a report to clients.

This price is $11/t higher than the benchmark $129/t premium coking coal deal BHP Billiton Mitsubishi Alliance landed with Nippon Steel in March.

“China looms large in our forecast, keeping the market in balance this year and potentially leaving the market tight as the rest of the world recovers,” Macquarie said.

“Of the bulk commodities, coking coal probably presents the best leverage to any recovery in the world economy.”

Macquarie has upped its forecast of Chinese pig iron production from 457 million tonnes to 500Mt as more stringent safety regulations hamper the nation’s small coal mine sector.

“Given continued constraints on domestic mine production, we think China will need to import around 27 million tonnes of metallurgical coal to fuel this pig iron production, maintaining the recent rate of imports through the balance of this year.”

There will be less fear of any more production cuts in Australia and Canada coking coal operations, according to the investment bank.

“In this scenario, we are more likely to see idled mining capacity switched back on through the second half of 2009 in Australia, where both BHP Billiton and Xstrata have significant spare capacity, and perhaps Canada, where Teck [Cominco] and Western Canadian are both operating below capacity.”

While the analysts have noted that recent spot coking coal deals in the country would put high-quality material at around $120/t, Macquarie expects Chinese industry to hold up demand in the interim before global demand lifts.

“When demand improves outside China, it could find the market short of coal. We saw through 2007 and 2008 that coking coal prices have a propensity to spike in these conditions, as there are relatively limited stocks to call on and demand is price-inelastic,” Macquarie said.

Commenting on the prospect of another price spike, Macquarie said it would be limited by the amount of spare mining capacity still left in the Australian, Canadian and US coal industries and a possible Chinese domestic supply response.

“These factors limit our bullishness on the sector, but China’s import demand this year means coking coal contract prices are likely to rise as the rest of the world recovers into 2010.

“We could see significant increases should China maintain its recent rate of imports beyond 2009.”

For thermal coal, Macquarie is expecting Newcastle spot prices to be greater than $US70/t for the September quarter as the availability is getting tighter.

Over the medium term the bank is more bearish.

“Chinese import demand appears robust at $60 to 65 per tonne prices.

“A reversal of the recent rally in oil prices, consistent with our own oil price forecasts, should bring downward pressure on prices.

“However, Newcastle prices have remained fairly consistently above $60 per tonne this year, even where oil was trading below $50 a barrel, and this is our new base case trading range for Newcastle thermal coal.”

Production cuts to Australia’s longwall sector this year include Xstrata’s decision to suspend production from its Oaky No. 1 mine in Queensland and a 15% output cut at Rio Tinto’s Kestrel longwall in the state.

Western Canadian Coal has made production cuts at its Wolverine and Brule complexes in northeast British Columbia, and Teck has sliced production and about 240 jobs from its coal operations.