China's demand for overseas thermal coal was curbed in May, as strict COVID measures constrained economic and industrial activities. Since the country pledged to bring back the economy to normal from June, will China scale up purchases of thermal coal from abroad?
China is the largest buyer of Indonesian thermal coal. By far, no signs have shown a rebound in purchases. China's absence prevented Indonesian coal from rising further in the past month. Multiple factors, including India's solid demand, growing interest from Europe to substitute Russian energy products and weather-related supply reduction in Indonesia could have driven up prices of coal from the archipelago.
As of May 31, seaborne coal arrivals at Chinese ports totaled 14.89 million tonnes, a 32.4% fall from a month earlier, Kpler's cargo-tracking data showed. Receipts from Indonesia reached 9.39 million tonnes, falling 35.4% from April.
Besides COVID restrictions, the Chinese government's price control and term contract boost measures reduced Indonesian coal's price edge against domestic coal.
While the government's price policy is only targeting domestic thermal coal, Chinese traders chose to buy more from the domestic market to replace part of imports for cost effectiveness. Domestic purchases were quite good in early May, but buying interest started to retreat lately.
In May, domestic supply was curbed somewhat by the maintenance of Daqin, the key rail line hauling coal from mines to northern ports. As the maintenance has concluded, domestic supply is expected to improve in June.
Meanwhile, the central government has highlighted price compliance of medium- and long-term contracts, vowing harsh penalties on any violations. This suggests a possible improvement in contract supply in June.
If there's steady delivery with high contract fulfillment, the demand for overseas coal would be affected. However, it remains to be seen as some problems haven't been well addressed, e.g. tight railway capacity.
The price spread would impact demand for seaborne coal, particularly if Chinese prices are falling while Indonesian miners are reluctant to cut theirs.
The current Indonesian market, which has been flat for weeks, could attract some buying interests from China, yet still depending on its price advantage.
Other factors such as the Chinese Yuan's depreciation and increased freight rates could also affect demand next month, though temporarily in favor of a demand improvement.
(Writing by Alex Guo Editing by Harry Huo)
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