Following the modest recovery in seaborne coking coal prices since the start of April, the arbitrage against Chinese domestic prices (on a delivered basis) has narrowed considerably, falling to about $10 per tonne on Macquarie’s calculation compared to a peak of about $30/t in February.

“The seaborne coking coal market is looking fundamentally better, with spot and contract prices rising as ex-China buyers return to the market,” Macquarie said.

“Chinese domestic prices, meanwhile, have continued to soften.

“However, as the import arbitrage narrows, we believe Chinese steel mills will turn back to the domestic market, potentially driving production to new highs and putting upward pressure on domestic prices.”

As ex-China buyers increase their draw on seaborne material, Chinese mills will need to increase the volumes they take from the domestic mines, according to Macquarie.

“Despite coke production in China rising 7 per cent year-on-year year to date, apparent Chinese coking coal production (calculated by subtracting net imports from demand implied by coke production) has risen just 4 per cent and is yet to hit last year’s peak levels,” it said.

“Given that we expect Chinese imports to start to contract as availability declines and that we expect steel production to increase, we expect Chinese coking coal production to set new record levels in the second half.

“This additional supply will need to be incentivised with higher prices.”