(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, May 24 (Reuters) - With China's steel and iron ore bubble popped, the market is struggling to work out what price levels these commodities should be trading around. Perhaps coking coal provides good guidance.
Coking, or metallurgical, coal is the second major component, along with iron ore, in making steel, but it doesn't attract as much attention given the limited ways to trade it and relatively strong concentration of producers.
This means that coking coal prices didn't enjoy the massive rallies enjoyed by iron ore and steel between December and the peak in late April, and also haven't suffered the same dramatic declines.
Chinese iron ore futures traded on the Dalian Commodity Exchange (DCE) DCIOcv1 surged by 90 percent from their December low to the peak on April 25.
They have since slumped by 25 percent after the Beijing authorities and China's exchanges enacted measures to curb speculative buying.
DCE coking coal contracts DJMcv1 rallied 38 percent between the 2016 low on March 4 and the peak on April 25, and they have subsequently slipped 15.5 percent to close on Monday at 691.5 yuan ($105.57) a tonne.
What this shows is that DCE coking coal followed a similar pattern to iron ore, but the gain and loss was nowhere near as pronounced.
The difference becomes even more stark when looking at prices outside of China's domestic exchanges.
Spot Asian iron ore .IO62-CNI=SI rallied 86 percent from its December low to the 2016 high of $68.70 a tonne, and has fallen back 23 percent to close at $52.70 on Monday.
In contrast, Australian free-on-board coking coal prices gained only 20 percent between the end of December last year and April 25, when the Chinese futures peaked.
Since then, coking coal prices in the world's top exporter of the fuel have actually increased modestly, rising 2.3 percent to $94.40 a tonne as of Monday.
In other words, coking coal has enjoyed gains this year and has maintained them, while iron ore and steel have had larger swings and been more volatile.
This can largely be explained by recognising that coking coal isn't as actively traded as iron ore and steel, a fact that also likely makes it a better indicator of the true state of the steel-making complex.
COKING COAL'S SENSIBLE RALLY
Coking coal's rally would appear to be justified by looking at China's import numbers.
In the first four months of the year, coking coal imports rose to 16.793 million tonnes, up 14.7 percent from the same period a year ago. has been grabbing the lion's share of China's imports, providing 8.95 million tonnes in the January-April period, up 27.8 percent from the same period in 2015.
China's increased appetite for imported coking coal dovetails with its rising steel output, which hit a record high in March.
This strength continued in April, with steel output actually higher than March on a daily basis but slightly lower month-on-month given April has one day less than March.
Assuming China's steel output stays at robust levels, it's likely that coking coal imports will defy the trend toward lower overall coal imports.
Coking coal is also getting a boost from India, with imports in 2015 exceeding those by China.
Like China, India is cutting imports of thermal coal for power generation, but is still increasing purchases of coking coal to meet rising steel output.
Both India and China lack high quality domestic reserves of coking coal, meaning the outlook for coking coal is considerably brighter than it is for thermal coal.
That's not to say coking coal is a great long-term bet, as it does face the likelihood that global demand will stagnate as China has most likely reached peak steel output and growth in the rest of the world won't be enough to offset the slowdown in China.
But for now, coking coal is responding just as it should, enjoying price gains in line with increased demand, but shunning the wild swings that come with large exposure to Chinese small investors. (Editing by Ed Davies)