Large capacity release could weigh on China's thermal coal market

sxcoal.com Viewpoint,  Price,  Thermal Coal 2022-05-24 17:51:37

Market talk that China would work on a "concentrated" expansion of coal production capacity in the key producing hub of Ordos, Inner Mongolia has fueled further bearishness in the domestic thermal coal market.


The rumor, which Sxcoal cannot immediately confirm, came after a State Council meeting late last week chaired by Premier Li Keqiang, who pointed out "premium coal production capacity should be released as soon as possible by cancelling production restrictions when necessary and accelerating the construction of mature projects while ensuring safety".


China has asked miners to increase coal production capacity by 300 Mtpa this year to avoid a repeat of power crunch that stuck the country last autumn, as coastal utilities relying on seaborne imports could be easily affected by heft prices and supply shortage.


China's coal production in April stood at 362.8 million tonnes, jumping 10.7% year on year, official data showed. The daily production was calculated at 12.09 million tonnes, lower than the government's target of 12.6 million. Even though, it was still the highest for the month in the past four years at least.


The rumor, if true, bodes well for the rebalance of supply and demand, which in turn would help cool down the market. This is reminiscent of a similar situation in mid-October last year when the government managed to put the market under control from a historical high through a combination of price control and new capacity release in producing regions.


"We'll see if there is substantial production increases," said a Beijing-based trader, who added the market sentiment weakened this week with more traders lowering offers to elicit buying interest.


However, the overall demand was dull as coastal utilities, most of which are well-stocked, sought for more clarity on the potential supply increase. Only a few utilities with pressing need were looking for cargoes in the market.


On May 24, an Inner Mongolia 5,000 Kcal/kg NAR cargo was heard traded at 1,120 yuan/t FOB northern ports.


"The market is so weak that 5,000 Kcal/kg NAR cannot be traded at 1,150-1,160 yuan/t," said a Shanxi-based trader. "There's no buying interest for 5,500 Kcal/kg NAR at 1,300-1,320 yuan/t."


Traders attempting to make deals offered 5,000 Kcal/kg NAR coal at 1,100 yuan/t, while those betting on a higher market offered at 1,150 yuan/t or so, he added.


Diverged outlook

Many end users, including industrial factories, held back on their purchases, awaiting further news whether the production increase can be materialized.


A papermaker said his plant is controlling coal inventory to 10-15 days of use. "We'll buy in the spot market only when necessary."


However, some traders believed a renewed rally is on the cards next month, citing several factors such as gradual lift of COVID lockdowns in several cities including the major financial hub of Shanghai, growing temperature as the summer arrives.


Coal consumption at major coastal power groups was on a modest rise, while their stockpiles declined. Sxcoal learned the number of power plants with stockpiles lower than seven days of use increased compared with a week earlier.


And, it is worth of noting that coal prices at producing regions are on the rise. On May 24, Sxcoal observed 12 out of 20 surveyed coal mines lifted their prices, ranging 20 yuan/t to 80 yuan/t while only two cut prices by 50-100 yuan/t.


A major coal mine based in Yulin, Shaanxi province hiked offer prices by 20 yuan/t for all types, effective May 24. It has been raising prices for several times this month.


Higher mine-mouth prices would help support portside market in the near term, if there is no or little new capacity to be released immediately.


(Writing by Alex Guo  Editing by Tammy Yang)
For any questions, please contact us by inquiry@fwenergy.com or +86-351-7219322.

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