Barely a year ago commentators were preparing obituaries on coal; the global market was oversupplied and demand growth was forecast to slow on the expectation of environmental protectionism outweighing the economic value of a cheap fossil fuel. Coal prices slumped around 25% in Asia and 35% in Europe during 2015, with the falling price making many refining operations uneconomical, particularly in Indonesia, the world’s largest thermal coal export market.

But coal has been resurgent this year; the benchmark Newcastle futures contract has gained almost 115% since January to trade at almost $100/tonne with the Rotterdam futures contract gaining 97% to almost $85/ tonne. Physical coal prices are now at their highest since 2014. Underlining the bullish market, Glencore and Japanese utilities settled thermal coal contracts in the fourth quarter at $94.75/tonne in October, up from $64/tonne in the previous quarter with coal now very much a sellers market as demand outstrips supply.

Asia continues to be the main driver in the global coal market. China’s growing conversion to environmental protectionism was pivotal in pushing coal prices lower. The world’s largest coal importer placed constraints on coal use in heavily polluted northeastern cities, including Beijing, and committed to reducing the share of coal in generation as it ramped up investment in gas, nuclear and renewable resources.

In December 2015 Beijing announced it would close more than 100 coal mines in 2016, removing 60 million tonnes of unneeded capacity, having removed 70 m tonnes of production in 2015. The policy was aimed at easing severe domestic oversupply with coal demand sliding in tandem with a slowing economy that is shifting from industrial production to consumption led growth. Then in March 2016 the government halted construction on new coal-fired plants in 15 regions as it continued to flex its muscle to reduce the country’s coal dependence, followed later in the year by its ratification of the Paris Climate Agreement.

The problem, from a price perspective, was that China acted too quickly in removing domestic production. China’s coal policies are a major dictator of coal prices and by cutting domestic production too quickly it forced Chinese utilities to buy coal from elsewhere, which has sharply pushed up its price as Chinese imports increased by 30% in August. With Japan’s coal imports broadly stable year-on-year, and with India’s imports reducing as it increases domestic production, the imbalance between Chinese demand and domestic production was more than sufficient to initiate a price rally that is expected to continue through the northern hemisphere winter that is forecast to be significantly colder in North Asia than the preceding two winters.

But what China creates it can also rectify, and with Beijing calling the current price rally “unsustainable” and “without market foundation” actions are expected.

Clearly the price rally is unsustainable. As the price increased coal mines that had been mothballed in Indonesia became profitable again. Indeed Indonesia now expects coal exports to meet targets this year after falling 43% below target in 2015. Increased supply is also expected in Australia, with Glencore hiring 200 workers at its Collinsville mine after scaling back production earlier in the year, and also in the US, where output fell 22% this year.

Increased supply in 2017 will rebalance the market and, as demand reduces after the northern hemisphere winter, should push prices lower. The question though is whether coal will become a more seasonal market with strong winter price peaks, with price peaks and troughs both bringing market supply-demand problems; peaking prices encourages more production as miners reap the economic benefits, while price troughs discourage miners but encourage the construction of more coal- fired plants by lowering the cost of the fuel.

This brings us to the second observation made by Beijing, namely that the price rally is without market foundation. Clearly this is a false observation. Commodity markets are priced on the macroeconomics of supply and demand, and thus the current price rally has a strong market foundation – the irony being that it was directly caused by Beijing’s poorly thought-through market intervention.

The sub-text of Beijing’s observation is that while it publically supports market- based pricing, which it has to in order to attract investment and preserve China’s economic integrity, the country remains centrally controlled with a disapproval of highly volatile commodity prices.

China is to coal as Saudi Arabia is to oil: it wants a coal price that protects its fiscal interests and at the same time discourages other producers from undermining this price. From recent comments made by Beijing it would appear that it wants a coal price below $60/tonne. At this price it could protect domestic coalmines and discourage increasing production from Australia and Indonesia. And by adjusting its domestic production it should be able to realise its coal price target.

Indeed there are signs that China is seeking to create a buyer’s cartel in the coal market similar to that of Opec, with the National Development and Reform Commission, China’s central economic planning organisation, convening a meeting in October to develop a scheme that prevents the recurrence of another price rally.

If we assume that coal imports into Japan and Korea will continue fragile, while India maintains its domestic production increases, then China should be able to dictate coal prices in the medium-term through regulatory intervention. And to those that may frown on coal prices being dictated more by regulatory intervention than market forces – other counties are following similar approaches.

Low coal prices are bad for climate change and, given that there are abundant global coal reserves, if government’s want to limit coal use they cannot allow prices to be left to market forces.

Somewhat ironically, regulatory intervention by China to manage domestic production such that it keeps coal prices between $50 and $60/tonne may provide the environmental and economic benefits sought by other countries, namely that investment in new coal-fired generation becomes increasingly uneconomic as the unit cost of renewable generation falls, while the economic prosperity of efficient coal mines are protected.

Not so much new king coal, but new coal king China. 

*Jeremy Wilcox is managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm.