Global thermal coal prices which had been rallying over the past two months, even touching levels of $250/tonne (high-CV 6000 NAR) have seen a dramatic decline since the past one week.
While the rise was triggered mainly by China’s increased buying of imported coal ahead of the winter season, the fall is also happening due to the Chinese government intervention to stabilise coal prices.
The move has dragged down thermal coal futures in China to their lowest in more than a month to 1,235 yuan/t ($193/t), on the Zhengzhou Commodity Exchange.
South African prices: RB1 (6000 NAR) grade prices has also corrected from a high of $244/t as on 14 Oct’21 to $165/t as on 28 Oct’21 for the November contract.
Indonesian prices: These, however, have remained resilient due to their tight supply, trading at $216.6/t as on 22 Oct’21, up 44% m-o-m.
Why did the Chinese government intervene?
As the coal crisis worsened in China in the last few months due to domestic shortage, forcing several provinces to cut down on power consumption and factories to even suspend operations, the country’s top economic planner, the National Development Reform Commission (NDRC) allowed the government to take control of the situation to bring stability in prices.
Subsequently, to curb speculative activities, NDRC has started on a process to adopt a benchmark price for coal with a floating and reasonable range of 500-570 yuan/t ($78-89/t) for long-term thermal contracts and has also included coal in a “prohibiting exorbitant profits” category.
The planning committee has been looking into the cost and profitability of the coal sector and has flagged severe punishment if protocols are not followed.
Further, NDRC also directed a “clean-up and rectification” work at storage sites in some coal-producing areas and ban on sites set up without approval.
This came after many unlicensed coal storage sites around mines in the main producing areas of Shanxi, Shaanxi and Inner Mongolia were heard to be behind the illegal hoarding of coal.
Supply situation in China at present
Several domestic mines have increased their coal output as the Chinese government has been pushing miners to ramp up output and increase imports. Few mines that were closed due to floods were also heard to have resumed production.
However, power plants continue to struggle for imported fuel supply due to vessel congestion at ports and lower availability from Indonesia.
Outlook
Despite improving output, experts believe the supply shortage will persist for at least another few months in China. This will limit any sharp fall in thermal coal prices as the supply gap continues to remain wide with the ongoing ban on Australian imports.
However, Indonesian coal prices, that have remained high due to tight domestic supply conditions and robust demand from China since the beginning of this year, may also witness some consolidation with Chinese traders inclined towards cheaper domestic coal.
The high-profile trade spat between China and Australia saw some improvement of late after a few Australian cargoes were cleared by Chinese Customs. The ban may, however, continue to remain as it is more of a political nature than economic.
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