On the evening of 19 Oct’21, the National Development and Reform Commission (NDRC) of China published an article titled “The National Development and Reform Commission’s Study on the Implementation of Intervention Measures on Coal Prices in accordance with the Law” on its official website. The article pointed out that the recent and rapid rise in coal prices, hitting historical highs in quick succession, has significantly pushed up the production costs of downstream industries, and adversely affected power supply and winter heating.
That same evening, the Zhengzhou Commercial Exchange announced that, starting from the night trading on 20 Oct’21, the price limit of thermal coal futures contracts will be lower by 10%.
DCE Coking coal futures – Jan’22 contract
Consequently, the limits have been lowered on major contracts, which also drove the major contracts of rebar and hot roll coil futures to fluctuate and fall. On 20 Oct’21, the domestic spot market declined.
Energy demand-supply imbalance
The current global energy industry has seen a significant imbalance between supply and demand, leading to a sharp rise in global energy prices. According to customs data, in the first three quarters, the price of imported crude oil rose by 32.8% y-o-y, the price of imported coal rose by 16.3% y-o-y, and the average price of imported natural gas was up 5.1% y-o-y.
The prices of Chinese domestic thermal coal increased by 137% y-o-y, while the price of domestic coking coal increased by 267% y-o-y. The price of domestic metallurgical coke increased 117% y-o-y.
State’s intervention impact
So what impact will the State’s intervention in coal prices have on the domestic steel market?
According to Lange Steel Research Centre, there will be several.
- First, the most direct impact is that the decision will prompt coal prices to “return to rationality”, thereby easing the tight domestic power supply situation. It will also ease the prices of direct raw materials for steel manufacturers. Steel mills, labouring under the impact of soaring costs, will have room for reducing steel prices.
- Second, from the perspective of energy supply, China is speeding up increase in coal production capacity. Since September, the NDRC has allowed 153 coal mines to increase capacity by 220 million tonnes (mn t) per annum. In the fourth quarter, these mines can increase production by more than 50 mn t.
The 38 mines with production riders are included in the emergency coal mines category, which will allow the release of capacity in a phased manner, with a total production capacity of 100 mn t per year.
While increasing coal supply, the state’s intervention in coal prices will help coal-fired power utilities to generate more electricity, and increase energy supply. At the same time, the country is also increasing its support for clean energy.
On 20 Oct’21, the National Energy Administration issued a notice to promote integration of new power generation projects this year. It also said China’s electricity consumption has grown rapidly, and supply and demand continue to remain tight. Speeding up development of wind and solar power projects will not only help alleviate the tight power supply scenario, but also achieve the goal of dual control of energy consumption and promote transformation to a low-carbon economy. Guaranteed power supply will benefit domestic steel mills too.
Stability in power supply is especially important for the manufacturing industry.
- Third, from the perspective of energy consumption, keeping in mind China’s goals of achieving “carbon neutrality and carbon peaking”, the economy will gradually transition to low carbon, and power consumption will be restricted for high-energy-consuming industries.
High energy-consuming industries will become the key targets. On 8 Oct’21, the National Standing Committee proposed to adjust the fluctuation range of the electricity transaction price from 10-15% to no more than 20%.
For the iron and steel industry, “power curtailment” will mean a decrease in output, while “high electricity prices” will mean an increase in costs. At present, many provinces and cities have vigorously promoted electricity reforms, and power tariffs for iron and steel production enterprises have increased 20- 50%. For electric arc furnaces, for instance, this will consume 60-70% of their profit.
Outlook
In the short term, the state’s intervention in regulating coal prices will obviously ease the pressure on domestic coal and electricity prices.
For steel mills, direct raw material prices will decrease but power tariffs will increase.
The decline in supply will stabilise domestic steel demand.
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