[Your shopping cart is empty

News

China Is Determined To Kill The Coal Price Rally

China Is Determined To Kill The Coal Price Rally
Coal has come back to the global energy market in a fashion that very few could have anticipated – on the back of a massive energy crunch, the consequences of which span across continents. Also, there could not have been a worse time for coal making a return, literally weeks before the much-anticipated COP26 summit takes place in Glasgow. China, the world’s largest coal producer and consumer, has played a major role in driving thermal coal prices higher. Despite gas making substantial headway over the past decade, coal still accounts for 60% of China’s electricity generation. Hence, in order to curb the coal price surge, China has decided to act before import economics starts to damage the profitability of utilities.  The past couple of weeks have seen gas prices cool off a bit. Europe’s TTF month-ahead benchmark lost some €30 per MWh from its peak of €116 per MWh (the equivalent of $40 per mmBtu) attained on October 05, yet it is still six times higher year-on-year (throughout Q4 2020 they traded around €15-17 per MWh). This means that European gas-to-coal switching is here to stay for most of H1 next year at least and presuming that the overall dearth of natural gas is to continue over the upcoming months, the profitability of coal might become a year-long phenomenon. Gas futures would seem to corroborate this picture as it is only in Q2 2022 that they suddenly drop below the €80 per MWh, currently assumed at around €45 per MWh. Asian spot LNG prices remain unseasonally elevated, with recent trades already flirting with the 40 per mmBtu mark.
Coal prices have also started to diverge regionally, with Europe’s coal futures seeing the same downward movement as TTF gas futures did, whilst Newcastle coal prices in Australia have been trending sideways in recent sessions, at levels still more than double to their 5-year average, around $230 per metric ton. One might assume that this would only be a temporary blip, but the current structure of futures suggests otherwise. Coal futures point to a sharp decline next year, with ICE Newcastle dropping below the $150 per metric ton mark by next April, but there is not a single month in the upcoming 3 years where coal futures decline below $100 per metric ton - which was where they were for most of 2019-2020.
All of the above did not go unnoticed with the globe’s largest coal producer and arguably one of the most coal-dependent major economies globally, China. China has struggled to boost coal production over the course of this year due to unforeseen natural disasters and the pandemic. This failure to produce sufficient coal contributed substantially to the mandated electricity curbs that debilitated industrial production in most states. Coal prices were relatively elevated in the first half of the year but the real trouble started around September when the energy crunch propelled them to heights previously unseen, with Zhengzhou thermal coal futures peaking at 2200 CNY per metric ton in mid-October. Prices effectively doubled in a time span of less than 45 calendar days.  
Last week, however, brought a new twist to the story. Just when it seemed that nothing could stop the coal price rally, Chinese coal futures started to plummet. Last week, the Zhengzhou thermal coal futures for January delivery lost almost 35% of their value over the course of the week. Nearly 30% of this decline happened on Tuesday. Zhengzhou futures currently trade around 1400 CNY per metric ton, which has led to coking coal and coke futures also losing value. All in all, China’s path forward is based on two main pillars – producing as much as possible whatever it takes and taking control of the market itself.
Manipulating Coal Narratives (and Prices). One of the triggers behind the coal price crash came from China’s state planner, the National Development and Reform Commission (NDRC). The body introduced a series of measures aimed at controlling runaway prices. First, it claimed to have been considering measures to prevent coal-producing and trading companies from generating excessive profits, without explaining any details. Second, NDRC promised to introduce price limits when prices for crucial commodities soar too quickly. Third, both federal and regional authorities vowed to crack down on speculation and market irregularities, a phenomenon that the coal surge has been repeatedly blamed on. Fourth, NDRC said it would ask all coal-relevant futures exchanges to raise fees for participants.
It did not take that long to see the first results of this drive. The Zhengzhou exchange limited trading possibilities for non-futures company members and implemented a downward revision of margin requirements on coal trades. Moreover, the NRDC sent teams to China’s two main coal import ports in Qinhuangdao and Caofeidian to “supervise coal supply and price stabilization”. Simultaneously, inspection teams were also sent to distribution centers in central regions to crack down on speculation and publicly expose it.
Opening the Floodgates of Domestic Production. President Xi Jinping recently claimed that Beijing will do its utmost to ensure the stable supply of coal and electricity. Yet with China celebrating the Communist Party’s centenary this year and deliberately avoiding reputation-damaging events by banning unscrupulous mining activities, Beijing has curbed the nation’s overall production by shutting unsafe mines. This is no longer the party policy and the direction going forward is to produce as much as possible. Simultaneously to the expected production increase, the federal authorities were warning companies that they have zero tolerance for coal hoarding, holding regular talks with the nation’s largest corporations, persuading them to use energy rationally and use their stocks accordingly.
Within a couple of days, several of China’s largest coal-producing companies have dutifully pledged to ramp up output and consequently bring coal prices back down to a “reasonable range”, concurrently agreeing to a price cap for the winter and spring seasons of 2021-2022. October is already seeing a tangible month-on-month increase in coal production rates and if the current output levels are sustained over Q4, aggregate Chinese production is poised to reach an all-time high this year, at 4 billion tons.
By Gerald Jansen for Oilprice.com
Oct 27, 2021 12:12
Number of visit : 96

Comments

Sender name is required
Email is required
Characters left: 500
Comment is required