Metallurgical Coal Market

Is the coast clear?

Metallurgical coal prices have been flying again, touching $390/mt (according to Platts, PLV Low Vol FOB Australia) overnight. This article is going to examine why and hopefully ascertain whether the coast is clear or not to go long and large met producers.

Chinese Economic Outlook

First, let’s review the Chinese economic situation. The following chart shows the two Chinese economic leading indicators that I track, and I’ve attempted to annotate the UP and DOWN cycles on the chart with green and red arrows:

The annual % change in China M1 tends to lead the YoY change in the 5yr Yields, but there is a lag in the M1 data and sometimes it doesn’t respond (see 2014). So I like to look at both indicators together. Right now we are clearly in an UP cycle, having bottomed in early 2022.

You can see how the leading indicators correlate somewhat to the Li Keqiang index, which is a well known proxy for Chinese GDP (for those who don’t quite trust the Chinese data):

I’ve also compared them to Chinese Manufacturing PMI’s, which works ok, but the data starts to get messy:

What I really want to gauge is the Chinese Steel sector and the positive response to the UP cycle in that sector. In order to do that, I use the Chinese Steel PMI, “New Orders” + “Production” metrics. This item is in purple below. You can see how the cycles line up, but the steel sector displayed a very poor performance in 2022 relative to the 5yr Yield YoY%. This was due to the weak real estate and construction sectors.