[ferro-alloys.com] China's steel production growth and tighter domestic coal supplies are likely driving a rebound in met coal prices, analysts at investment bank FBR said Monday.

Prices had been recovering in June after a longer fall from a peak in April lost momentum. Platts Premium Low Vol HCC ended last week assessed at $153/mt FOB Australia, up from $139.50/mt on June 15.

Cyclone Debbie disrupted shipments from Australia in April and May, with spot prices spiking in reaction to the loss of output of high quality coking coal.

Coal production in China is not keeping up, as Chinese met coal output is lagging demand from the steel sector, FBR analysts led by Lucas Pipes said in a report. Output and shipments from Australia and the US are growing and may remain strong, FBR expects.

Import data showed a loss in May volumes from Australia had left China more reliant on domestic coking coal and drawing down stockpiles, with domestic HCC prices at higher levels than imports over May and June, based on S&P Global Platts data.

Demand in China for thermal coal to boost power generation after flooding disrupted hydropower may limit growth in met coal, FBR added.

"Strong Chinese steel fundamentals offer the best explanation for the recent recovery in met coal prices," FBR said. "Monthly Chinese steel production has hit an all-time high in April and has remained near these record levels through May. Yet Chinese met coal production has remained relatively constrained."

FBR cited steel margins in China at high levels, as steel prices rose on demand led by rebar amid lower iron ore costs and the decline from an earlier peak in coal prices.

The Platts China HRC and Rebar export spreads, which tracks the difference between the export steel prices and imported iron ore and coking coal, supports this observation.

The HRC export spread has risen further from June's $260/mt average to almost $280/mt last week, with the metric trending at the highest levels since 2014.

"Chinese steel production is up 4% YOY; but, unlike steel, coal production is far from making new record highs: Average Chinese met coal production in 2017 is still 24% below the record high of 52.5 million mt in December 2013," FBR added, citing third-party data.

As for seaborne met coal supply growth, a rebound in Australian shipments, and higher output from Canada are also being factored in.

"Seaborne met coal supply has most recently been increasing from the largest supply regions. Queensland port loadings (which we use as a met coal export proxy) recovered to 19.8 million mt in June, which is above 2016 average monthly shipments of 18.4 million mt," FBR said.

"We expect continued supply growth from the US over the course of this year and into 2018," FBR added.

• [Editor:Wang Linyan]