With the typhoon “Hinnamnor” moving northward, the heatwave hit South China again but the intensity and persistence are significantly weaker than before.
In this case, it is limited to relying on the demand side to support the thermal coal market. At present, the main driving force behind the rise still comes from the supply side.
Coal production and transport have been dented by the COVID-19 outbreak in major producing areas. Anti-spread measures, including shutdown of mines and roads, suspended production, especially at small- and medium-sized mines, and disrupted truck transports. While these measures have been eased in some places, the impact still lingered to date.
The impact is, after all, short-term and will not expand to the entire market, so how will the market pan out in September?
There are some positive factors. First, the portside coal shortage is difficult to change substantially in the short term.
After the epidemic basically came under control, certain constraints, such as safety and environmental checks, on the supply side is likely to keep in place ahead of the 20th National Congress of the Communist Part of China, which is scheduled to start on October 16. Supply may be difficult to restore to previous high levels in the short term.
In addition, a decline in rail supply from mines to ports has been observed, dented by temporary rail maintenance. In the past week ended September 2, the daily shipment of Daqin line declined to 1.22 million tonnes from the previous 1.3 million tonnes when running at full capacity. With the maintenance ongoing this month, the line’s shipments will continue to be curbed.
Second, supports from the demand side will linger on.
Despite falling from the peak, coal consumption remained high at power plants in coastal regions. With quick consumption in the summer, power plants need to ramp up coal restocking before onset of the winter. At the same time, power and heat plants in the north will start the “group purchase” late this month for the winter storage.
Third, support is visible from the upbeat global energy market.
One more factor that cannot be ignored is the international energy market, which has become increasingly unsteady after the Russia-Ukraine conflict. Europe is currently in the middle of a surge in demand for energy after it imposed sanctions on Russian imports. With the mismatch between supply and demand, global prices are skyrocketing and eventually will add to the upward strength to the Chinese market.
But the negative factors are also obvious.
The biggest inhibiting factor lies in the continued macroeconomic slowdown. We saw the effect to boost consumption fall short of expectation, the COVID-19 epidemic flare-ups in many places, the bearish outlook for the real estate market still prevailing, the U.S. Fed release a “hawkish” interest rate signal in September, etc.
Weaker economic dynamics will translate into reduced demand for electricity, which will eventually be passed on to the coal market.
In addition, the government will continue its regulation on coal prices and maintain production at a high level, like what they did in the last winter heating period. In mid-October last year, the market suddenly plummeted from a historical high as the government ramped up efforts to cap the prices and release more production.
Generally speaking, with the supply still not fully recovered, coal prices have the possibility to continue to move up in the future, but the space is limited.
In the medium and long term, the demand-side changes need to be further observed. The traditional industrial peak season will drive up the demand if the stimulus measures are effective. Otherwise there will be downward pressure, but under the tight supply of goods in the market, the decline may also be limited.
Note: This article has been exchanged under the article exchange agreement between CoalMint and Sxcoal.
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