LAUNCESTON, Australia, Oct 21 (Reuters) - China's latest
attempt to lower runaway commodity prices, this time for thermal
coal, is likely to follow a familiar pattern of initial success
followed by failure.
So far this year, Beijing has acted to cool prices for
metals such as copper, aluminium, zinc and iron ore, and for
energy products such as crude oil and now coal.
Each intervention has met with some success at first, but
over time prices have reverted to their prior upward trends.
The exception is when the fundamentals of supply and demand
actually change, as it did for iron ore, which dropped sharply
from its record high after China actually cut steel production,
and supply of the raw material recovered after disruptions in
top exporters Australia and Brazil.
Beijing's latest target is thermal coal, which has soared to
record highs amid strong growth in electricity demand and lower
growth in domestic mine output amid official action to idle some
mines or expand safety checks, and to limit overall output in
order to cut air pollution.
Coal futures on the Zhengzhou Commodity Exchange
hit a record 1,982 yuan ($310.17) a tonne on Oct. 19, but have
since declined by almost 20% to 1,587.4 yuan in early Thursday
trade, following a statement from China's state planner that it
is looking at ways to intervene in the market.
While that 20% drop seems fairly dramatic, it's worth noting
that coal futures are still up more than 200% so far this year,
a massive increase that is having ripple effects throughout the
wider economy as costs for energy-intensive industries rise and
electricity is rationed in some parts of China, disrupting
Physical thermal coal prices in China also didn't follow the
futures lower in the wake of the government intervention threat,
with coal at the northern hub of Qinhuangdao <SH-QHA-TRMCOAL>,
as assessed by consultants Steel Home hitting a fresh record
high of 2,545 yuan a tonne on Wednesday, up 7.2% from the prior
Up until the coal crunch became evident from about May
onwards, the Qinhuangdao price had only once popped briefly
above 1,000 yuan a tonne, in January this year during the
It was a long-standing market shibboleth that the
authorities aimed for physical thermal coal to trade in a range
around 530 to 580 yuan a tonne, a level believed to keep both
mines and utilities profitable while providing reasonably-priced
The current prices show just how far removed from that ideal
thermal coal has moved, and while Beijing may succeed in capping
the rally, it will take a fundamental change in the underlying
market dynamics for coal to return to more normal levels.
Chief among these is supply has to improve, and while
domestic coal miners are committing to doing everything possible
to boost output, it will take several months for any impact to
China's unofficial ban on coal imports from Australia, which
used to be its second-biggest suppler after Indonesia, as part
of an ongoing political dispute with Canberra also isn't
helping, serving to boost seaborne prices as traders try to buy
alternatives from other suppliers, such as Russia.
It would seem that in the absence of a substantial change to
either the supply of thermal coal, or its demand, that Beijing's
efforts to cool prices will be short-lived, or that they will
have to be far more dramatic, such as imposing price controls.
When China revealed plans to auction metals such as copper,
aluminium and zinc from state reserves in June, again to calm
what were deemed to be excessive price rallies, there was some
initial declines in domestic prices.
Shanghai copper futures dropped as much as 13.6%
from their all-time closing high of 76,930 yuan a tonne on May
10 to the recent low of 66,470 yuan on Aug. 20.
However, since then they have climbed back to end at 73,640
yuan a tonne on Wednesday, within sighting distance of the prior
With aluminium futures, Beijing's auctions seemed
only to keep prices steady for a while before the rally resumed,
with the front-month contract hitting the highest in 13 years,
closing at 24,330 yuan a tonne on Oct. 19. It has since slipped
marginally, ending at 23,390 yuan on Wednesday.
For crude oil, the announcement of sales from the strategic
reserve in September also failed to dent the existing rally in
global benchmark Brent futures, despite China's status
as the world's biggest importer.
Brent contracts ended at $85.82 a barrel on Wednesday, up
from the $72.92 they finished at on Sept. 10, the day Beijing
announced crude oil sales.
The overall message is clear, intervention in markets by
Beijing rarely works for anything other than a short period of
time, and it takes a change in the fundamentals of supply and
demand to make any lasting difference.
(Editing by Kim Coghill)