By Ben Sharples

January 5, 2018 - Coal prices are poised to hold gains near the highest in five years as China’s drive to curb overcapacity sustains import demand by the world’s biggest consumer of the fuel, according to UBS Group AG.

Newcastle coal is forecast to average $84 a ton this year as China extends a strategy started in 2016 to reduce domestic output and streamline its industry, according to UBS Group AG analyst Lachlan Shaw. Prices are trading near $100 after averaging about $87 last year, the most since 2012. Miners are benefiting from the surge, including Australian producer New Hope Corp., which capped its first annual increase in six years.

“We think China will continue to close capacity through 2018 and into 2019,” Melbourne-based Shaw said by phone. “It has already driven better demand for seaborne thermal coal. The Chinese have made good progress but they still have maybe a third, to a half to go in terms of the capacity closure targets.”

By the end of the decade, China is seeking to trim overcapacity by 800 million tons, more than India’s entire 2014 output. While China cuts capacity, it has also pledged to add newer, more-efficient output, potentially capping demand for imports. UBS is the most bullish on prices compiled by Bloomberg. Citigroup Inc. predicts an average of $78 a ton this year, while Morgan Stanley sees $75 and Australia & New Zealand Banking Group Ltd. estimates $70.

Newcastle coal rose 1.1 percent on Thursday to $95.75 a ton, according to data from Globalcoal. Prices advanced 5.7 percent in 2017 for a second annual gain, ending the year at $100.10.

Shares in Australian producer New Hope advanced 51 percent last year, the first annual gain since 2011, while Whitehaven Coal Ltd. posted a second yearly increase. UBS expects coal prices to stay strong underpinned by China’s industry reforms, but cautions on new mine development.

“Coal prices will likely stay great for a year or two, but we don’t see a significant lift in underlying demand to justify investment in big new mine supply in the near-to-medium term,” Shaw said.