China will implement the minimum and maximum coal inventory system from 2018 to 2022, said the nation's top planner in a recent statement, a move conducive to ensuring supply and stabilizing the coal market and prices.
Utilities' stocks in northern coal bases like Shanxi, Shaanxi and Inner Mongolia in principle shall not be less than 15 days of use; stocks of power plants in other areas shall cover 20 days' consumption and above, showed inventory rules previously issued .
During winter and summer, power companies' coal inventories shall be five to 10 days above normal levels; when supplies are short and prices are rising, power companies can have on hand an extra 10-20 days of inventory.
Overcapacity still dominates the world's top coal producer and consumer, with yearly consumption at about 4 billion tonnes compared with production capacity of 5.1-5.2 billion tonnes per annum. Yet, mismatch between location of production and consumption areas and seasonal demand have caused sporadic tightness in some regions.
While triggering fast price rally, coal supply shortage would bring heavy cost burden to power producers. It may also give wrong market signals. Some small mines which have halted production may restart operation to chase profit in an upward market, hampering progress in reducing outdated surplus capacity.
Chinese coal miners failed to release advanced capacity timely to cope with severe supply crunch resulting from strong seasonal demand last winter. Many power firms saw coal stocks falling below safety levels in northern China, as they worked to meet household heating demand.
That was the result of multiple factors, including economic recovery, reduced hydro output, and stronger-than-expected demand for coal-fired power. Truck overloading crackdown, panic winter buying among other factors also played a role.
Thus, it is of great necessity and significance for coal production, logistics and consumption sectors to form multi-level coal storage system, to guarantee coal stocks across the country at a reasonable level and avoid market volatilities.
When coal prices sag in an oversupplied market, the minimum inventory rule will guide both supply and demand sides to store more coal to balance the market.
Similarly, as supply tightens and prices go up, the maximum inventory requirement will help prevent deliberate hoards by suppliers and end users, especially traders, and thus avoid further fluctuation of the market.
During recent years, authorities in some regions rolled out a series of rules regarding establishing coal reserve system and raising stocks. Though helpful in easing regional supply strain, these rules still couldn't meet the need of changing new situation.
A nationwide inventory system with binding force like the minimum and maximum coal inventory may serve this purpose, to a larger extent, in the government's view. Actual implementation, however, still could be a daunting task and takes time to see effect.
(Writing by Jessie Jia Editing by Harry Huo)
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