China’s thermal coal market experienced an M-shaped course in 2021, a real roller coaster in rises and falls that have been never seen in the past.
Extending the upward trend from end-2020, China’s domestic thermal coal price, basis the benchmark 5,500 Kcal/kg NAR, hit a high of 1,150 yuan/t FOB northern ports with VAT in mid-January as the supply tightness remained. Then the price went down quickly to 571 yuan/t at the end of February alongside the falling demand amid the slowdown in industrial activity.
Since March, the market had been rising all the way up to October, claiming the all-time high of 2,600 yuan/t FOB in the middle of the month, until the government stepped in to stabilize prices while boosting domestic production. After that, the price was nosedived to 820 yuan/t at the end of the year as the supply-demand imbalance improved.
Overall supply to be relaxed in 2022
With multiple tough measures implemented in 2021, we see the resilience of coal production this year, which is likely to increase more from 2021 as the scale of newly-approved capacity is huge and could bring substantial increments even if some additional capacity is withdrawn.
A total production capacity of 140 million tonnes per annum (Mtpa) was newly added in the first half of 2021, data from the National Development and Reform Commission (NDRC) showed. Another batch of more than 140 Mtpa for opencast mines were approved during July-September, including 43.5 Mtpa of prolonged trial-run projects. Excluding some projects still under construction and pending evaluation, a rough estimate of at least 230 Mtpa of capacity was added before the end of the year.
It is expected another 20 Mtpa of capacity would start commissioning in 2022, this is to say, around 250 Mtpa of capacity would continue running this year if the 43.5 Mtpa of trial-run capacity are allowed to start official operation.
In an extreme scenario, with an average daily production of 12-12.5 million tonnes as the year-end 2021, the national coal production in 2022 could reach 4.4 billion tonnes, a significant increase from 3.84 billion tonnes in 2020 and 4.05 billion tonnes in 2021.
Considering that if hydropower generation improves this year, as well as wind and solar installations further increase, the actual coal consumption may drop and the production would be adjusted downward to some extent accordingly. But overall, the supply is guaranteed. There’s a big probability that the supply shortage would not happen like last year after the state approved such a large scale of new production capacity.
This may weigh on the import market. Coal imports have been free of restrictions since November 2020 due to the persistent supply shortage. But if the domestic supply could be guaranteed, a drop in imports in 2022 would be likely, which would, in turn, put pressure on seaborne prices.
Demand to slow the rise in 2022
China’s GDP growth is expected to slide to 5-5.6% in 2022 from last year’s 8%. Based on the coal consumption per unit GDP in 2019, the coal use is calculated in 4.7 billion tonnes this year. But the figure could be overvalued as the coefficient would be lowered as the government will keep working on the carbon reduction policies.
It can be foreseen that high-energy consumption enterprises would be further suppressed by the government as carbon policies are progressed. The cool-down in the real estate industry and the in-depth market-oriented reform in the power sector would also slow down the coal consumption this year.
At the same time, despite a fall in hydropower generation in recent two years affected by the precipitation decline, the clean power source in 2022 is still worth looking forward to with Wudongde and Baihetan super-large stations adding more capacity into operation.
In 2021, China’s renewable power capacity was added by more than 1,000 GW, with hydro and wind each exceeding 300 GW. The annual production of renewables surpassed 1,000 TWh for the first time. Under the long-term carbon reduction goals, renewables will continue to squeeze coal’s market share.
In general, the national coal demand will continue to grow in 2022, but the increment may be smaller than that of the supply.
Price to fall with more frequent volatilities
Under the easing supply-demand situations, it will be difficult for coal prices to rise significantly in 2022.
Meanwhile, the government has set a price range of 500-850 yuan/t for the 2022 annual long-term supply contracts, the spot market would probably move downward to close the range.
The government covered all mines with annual production above 300,000 tonnes into the long-term supply system, requiring them to deliver at least 80% of output through long-term contracts. This means spot saleable volumes are further restricted, which might result in frequent volatilities especially in the busy seasons.
The mismatch between supply and demand in 2021 pushed coal prices to record highs, resulting in heavy cost burdens on various downstream industries, especially for utilities that were suffering serious losses. Therefore, supply sufficiency becomes the mainstream of the coal industry policy in 2021.
Note: This article has been exchanged under the article exchange agreement between CoalMint and Sxcoal.
Fenwei’s latest report 2021 China Thermal Coal Market Study and 2022 Forecast will make detailed data sorting and analysis from the macro economy, industry environment, coal supply-demand, price, logistics and transportation, import and export, etc., and make a forecast on policy evolution and impact on the coal market in 2022.
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