Stronger Chinese (and world) steel prices and mill margins, plus near record steel output rates in 2Q16 in response to China's 1H16 property and infrastructure led stimulus, have driven better met coal demand and prices, it said.

“On the supply side, China's much talked of supply restructuring is also playing out through the Chinese domestic coal industry, where output has fallen as the government instructs operators to reign in production,” it said.

“Feedback from our China trip in May noted how domestic supply cuts were rebalancing met coal markets.”


Met coal contract prices are higher for the second quarter in a row after recent trough levels in 1Q16 – even more so in selected local currencies such as the Australian dollar, which have weakened against the US dollar recently.

But UBS said it remains cautious towards the sustainability of current strong Chinese steel demand, prices and margins.

If demand does slow through 2H16, met coal demand will ease, it said.

“At the same time, new mine supply in Australia and Mozambique plus underutilised capacity in China and elsewhere could easily return to market and pressure prices lower,” UBS said.

“Finally, with oil prices appearing to lose momentum currently and the US dollar rallying recently, any cost curve reflation likely will stall in the near term.”


UBS expects a better outcome but prices are not expected to rally aggressively from here.

“The contract outcome for 3Q16 is a handy boost to met coal miners,” it said.

“However, with slowing demand and stable to rising supply in 2H16 into 2017, we see prices flat to lower over coming quarters. The settlement puts upward pressure on our current forecast of US$84/t for 2016E, but is unlikely to impact our 2017E of US$88.50/t.”