14 Mar 2019
Sentiment in the Chinese thermal coal market has turned cautious as demand starts to weaken after a surge in domestic and Indonesian prices since January, market sources said Tuesday.
The Asian seaborne thermal coal market started 2019 with a bang when demand for Indonesian low CV coal ramped up and Chinese domestic prices rebounded strongly.
There are several factors at play here, including the resetting of the annual import quota, China's stringent mine checks, India keeping coal for domestic use to ensure stable power supply in the run-up to elections in April-May, as well as import restrictions on Australian coal.
While the issue of stricter import restrictions weighed on market participants' minds just last December, this seems to be a non-issue right now due to the import curbs on Australian coal.
"It's still beginning of the year, so the total import volume is still low right now, and the authorities will not restrict imports all at the same time," a China-based trader said.
The restrictions on total import volume were put in place late last year as China tried to rein in imports. China had aimed to maintain its 2018 total import volume for all types of coal at the same level as 2017, 271 million mt.
Market sources said loading and custom clearance had been smoother at beginning of January, but shortly afterward delays were reported for cargoes from Australia.
Political tensions had been blamed for the import curbs on Australian coal, but government officials have dismissed this, saying checks were being conducted for environmental reasons.
KEEPING DOMESTIC PRICES IN CHECK
Market sources in China said it is unlikely that the authorities would impose blanket import restrictions because doing so would cause a further rise in domestic prices.
Price of domestic 5,500 kcal/kg NAR grade of coal was assessed Monday at Yuan 640/mt ($95/mt) FOB Qinhuangdao, up around 10% from Yuan 580/mt FOB on January 2.
China's top planning body, the National Development and Reform Commission, had tried to keep domestic 5,500 kcal/kg NAR grade coal at "reasonable prices" of Yuan 500-570/mt.
A south China-based trader said the authorities are likely to monitor the weather and the volume of imports closely to decide whether to ease or tighten their grip.
"Imported coal can be used as a mechanism to control domestic coal prices, and now coal prices are high, so if there is a total ban right now, domestic prices will surge further," a coal analyst said.
The fact that further curbs are likely not on the cards will be good news for Indonesian coal exports, but market sources expected the bullishness to be short-lived as factors that pushed up the prices, including Indian elections, are temporary.
Other Chinese traders added that prices of Indonesian low CV coal have been rising too rapidly, causing some utilities to even call off tenders.
For now, Chinese buyers are turning to other lower CV coal, including 3,400 kcal/kg NAR, which is deemed cheaper than 3,800 kcal/kg NAR.
"Most power plants are not willing to pay above $40/mt, so they are getting the lower grade instead," a south China-based trader said.
3,400 kcal/kg NAR (3,800 GAR) was assessed Friday at $31.70/mt FOB Kalimantan, while the higher grade was assessed $40.50/mt Friday, according to S&P Global Platts data.
Various Chinese market sources believe hydro-power will be ramped up around May, so there will be more sources of power supply later on.
"We won't see the authorities restricting imports of Indonesian coal right now, but it might happen later when demand turns soft, and when most domestic miners resume operations," a China-based trader said.
The Chinese authorities have introduced a slew of policies to ensure mine safety after two mine accidents in Shaanxi and Inner Mongolia in January and February, respectively. At the same time, the authorities also put in place directives to keep prices in check.
As the annual parliamentary meetings continue this week in Beijing, coal mines in Shaanxi and Inner Mongolia have not fully resumed operations.
Though safety checks will last through June, it is expected that mine production will slowly recover after the political meetings end on Friday, market sources said. Market sources added that industrial activity too has been slow to pick up as the economic outlook remains uncertain.
Last week, China cut its economic growth target to 6%-6.5% for this year.
Meanwhile, stockpiles at major power plants are still high at around 16.22 million mt, with coal burn standing at around 26 days, so there is no urgency to restock, market sources added.
Stockpiles are also high at various domestic ports, including those in north and east China.
"There's no lack of coal in China right now," an east China-based market source said.