Prices of thermal coal, used mainly for power generation, continued to fly high in September, after recovering from a brief decline that ended in late August, beating market expectations of a weaker price scenario in the traditionally slack demand month.
On September 19, the Fenwei CCI spot index of 5,500 Kcal/kg NAR thermal coal was assessed at 701 yuan/t ($109.9/t) FOB with VAT, 143 yuan/t or 25.63% higher than a year ago and rising 75 yuan/t or 11.98% from the end of August.
It is the first time for the index to break the 700-yuan/t mark since November 21 last year when it declined from multi-year high to 704 yuan/t, after the government stepped in to cool down the overheated market by loosening control of mines operation from 276 days to 330 days.
The index averaged 655.4 yuan/t FOB over September 1-19, 26.2 yuan/t more than the August average of 629.2 yuan/t, Fenwei data showed.
Industry insiders generally attributed this to earlier-than-expected pre-winter restocking, which typical start in November, and speculative hoarding by traders, in addition to persisting tightness of supply caused by tougher safety and environmental inspections.
In late August, market players and analysts expected the market to weaken this month as declining air-conditioning demand with the end of hot summer cut the demand for coal-fired electricity.
Coal supply in China has been relatively tight in recent months, particularly after local governments strengthened safety checks in the wake of a number of accidents happened in August.
Effective implementation of surplus and outdated capacity cutbacks across the country has also reduced the ability of quick response, though the government has been fast-track approval of advanced capacities. There are still lots of mines that can't realize full operation amid safety and environmental inspections.
Moreover, the previous large coal producers like Ningxia and Shandong now have become unable to support their own consumption; supply gap becomes larger in some provinces of the Northeast, Southwest and Central China.
Daily consumption was seen higher in September this year than the same period of the previous years. From September 1 to 20, the daily consumption of China's six major power firms averaged 702,600 tonnes, compared to 573,100 and 525,600 tonnes in 2016 and 2015, respectively.
Speculation is also helping drive up prices in the slack season. Traders were hoarding heavily, betting on bullish demand in the near term, according to one source with a power company based in East China.
"Every trader I know are hoarding coal," he said. "The least volume they hoard is 2,000 tonnes. Some even have hundreds of thousands of stocks in hand."
Traders' hoarding activities absorbed huge amount of coal that should have been supplied to power plants. If power plants did not have enough stocks, they had to compete with traders at high price level. That definitely contributed to price increases in the month.
Power plants in the northeastern region of the country showed desires of pre-winter procurements this month, as temperature there started falling. Some small-sized utilities had to replenish as their stocks couldn't support longer.
Large power plants, however, were not in such a hurry to buy at present high prices. With long-term supply contracts with coal mines, most of them sit on the sideline and waited for a good opportunity to restock.
"Traders and power plants are wrestling psychologically," the source said. "Traders bet power plants will come to them when stocks are running low; while power plants want to restock when traders lowered their offers."
Government authorities have recently unveiled detailed scenarios to cut coal consumption in key consuming areas like Jiangsu and Beijing-Tianjin-Hebei region ,including off-peak production in steel and electrolytic aluminum sectors, production restrictions at cement plants and cutbacks in low-quality coal mines.
These measures could cut 60-80 million tonnes of coal consumption in the fourth quarter, weakening market perspective in the months ahead, said Changjiang Securities in a research note.
(Writing by Alex Guo Editing by Harry Huo)
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