LAUNCESTON, Australia, Nov 30 (Reuters) - China's coal
crisis has largely been resolved with gains in both production
and stockpiles sufficient to ensure power supplies over winter.
But it's not quite a total victory, as thermal coal prices
remain at historically high levels, and are still above the
range the authorities are believed to view as comfortable for
both miners and power utilities.
Beijing appears to be well aware that prices are still too
high, sparking a fresh selloff of the main domestic thermal coal
futures contract on Monday merely be releasing a statement
saying it was time to reform the pricing mechanism.
Thermal coal futures on the Zhengzhou Commodity
Exchange slumped 5.4% on Monday to end at 821.2 yuan ($128.51) a
The contract reached a record high of 1,982 yuan a tonne on
Oct. 19 amid coal shortages and fears as to whether there would
be enough of the polluting fuel to meet peak winter demand.
The spot price of coal at Qinhuangdao in north China
<SH-QHA-TRMCOAL> has also retreated from record highs, falling
from a peak of 2,545 yuan a tonne to 1,090 yuan on Monday,
meaning physical coal still commands a premium over the
most-traded future, which expires on Jan. 10.
The coal crunch was largely self-inflicted by authorities,
with mine closures on safety grounds cutting output in the first
half, while imports were also affected by the ongoing unofficial
ban on buying from Australia as part of a political dispute
between Beijing and Canberra.
China is the world's biggest producer, consumer and importer
of coal, and was thus able to respond to the shortage of the
fuel by ramping up domestic production and importing more.
While a retreat in the futures price of 59% in less than six
weeks is a dramatic move, it still leaves the price above the
550 to 600 yuan range the market has long believed is the
Futures were at 451 yuan a tonne on the last trading day of
November 2020, and the peak in the previous winter was just
under 600 yuan a tonne.
It's unlikely that the price will fall to those levels
quickly, but China's state planner, the National Development and
Reform Commission (NDRC), is clearly targeting further declines.
"After recent abnormal rise in coal prices, it is time to
improve the coal prices mechanism," said the NDRC in a
statement, adding that all market participants have reached a
consensus on the reasonable range of coal prices.
WHAT IS 'REASONABLE'?
But the price deemed reasonable wasn't released, leaving
considerable uncertainty as to whether the NDRC is going to want
a return to the 550 to 600 yuan range, or whether it's prepared
to sanction structurally higher prices in order to ensure mining
companies commit capital to maintaining output.
Certainly, the forward curve for futures suggests the price
band is now higher, with the lowest price in the net 12 months
being the 686.6 yuan a tonne for the contract expiring in
These prices may look somewhat elevated in light of the
rapid response seen in domestic output and imports.
The NDRC said last week the volume of coal stored at power
plants was 147 million tonnes, and would reach an all-time high
by the end of November.
Furthermore, coal output is around 12 million tonnes a day,
and is exceeding consumption by about 2 million tonnes.
Imports have also picked up in recent months, and November's
seaborne arrivals are on track to be the highest since August,
according to Refinitiv.
Seaborne imports of all grades of coal are estimated at
22.64 million tonnes in November, up from October's 21.74
million and almost double the 11.84 million from November last
year, according to Refinitiv vessel-tracking and port data.
If the current domestic production volumes are maintained
and authorities continue to intervene in the market, it's likely
that China's domestic coal prices will continue to drop.
GRAPHIC: China coal production vs spot price: https://tmsnrt.rs/3IgLTkr
(Editing by Sam Holmes)