Shifting government policies in China may disrupt international coal markets, likely putting downward pressure on prices in the next few months, ANZ analysts said Friday.
China has continued to cool domestic prices by encouraging producers to boost output, the analysts said.
The countrys coal production in the first six months of the year rose 5% year on year to 1.71 billion mt. In June alone, China mined 308.35 million mt, up 10.6% month on month.
However, short term supply-side issues continue to support import demand for thermal coal in China, the analysts said.
“Impending constraints on key producing provinces are expected to see production struggle to pick up as the country enters the normal peak heating season,” ANZ analysts said.
Coal production from Inner Mongolia is expected to fall in coming months as the province prepares for its 70th anniversary celebrations, they said.
In addition, there has also been a ramp up in safety inspections, leading to a number of mines suspending operations, both in Inner Mongolia and Shaanxi provinces, the analysts said, adding these provinces produce almost 45% of Chinas total raw coal output.
“These constraints come amid relatively weak demand for coal in electricity generation,” the analysts said, adding that after peaking at around 15% on year, growth in coal consumed by utilities has fallen to around 6.9% in June.
Also, weaker-than-expected hydropower has also boosted thermal coal imports, the analysts said.
Heavy rainfall in early July in southern China saw hydropower plants forced to close up to two thirds of their capacity to limit damage due to flooding, the analysts said, adding that extended shutdowns are likely as water levels are still above warning levels in several cities in that region.
“This has no doubt led to some panic buying by utilities in the southern region,” ANZ said.
Over January-June, hydropower was down 4.2% year on year. Chinas coal imports were up 23% in H1, according to customs data.
Indonesian thermal coal prices have also been supported by weather-related disruptions, the analysts said.
“However, there are signs that the recent tightness in the seaborne market, which has pushed thermal coal prices up 20% over the past two months, may be coming to an end,” ANZ analysts said.
INCREASE IN EXPENSES
Long waiting times at Chinese ports as a consequence of the partial embargo on imports is leading to higher expenses for Chinese buyers and hydropower may get a boost once the flood situation improves in southern China, putting pressure on coal prices, the analysts said.
The price of FOB Kalimantan 4,200 kcal/kg GAR coal has risen 3.6% to date in July to be assessed Thursday at $42.50/mt, while FOB Newcastle 5,500 kcal/kg NAR has surged 7.4% over the same period to $74.40/mt, S&P Global Platts data showed.
“There is no doubt that the latest policy changes in China significantly increases the risk of Asian prices weakening over the next 2-3 months,” the analysts said. “However, the general improvement in sentiment in the wider commodity sector due to better than expected economic data may help mitigate some of the risk.”
–Deepak Kannan, deepak.kannan@spglobal.com
–Edited by Wendy Wells, wendy.wells@spglobal.com