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New UserCooler temperatures dampen China coal rally, but for how long?
23 Aug 2017
Cooler weather and ample supplies pushed China's thermal coal prices lower on Tuesday, spurring speculation that tapering demand may threaten the months-long rally even as concerns linger about slower output as Beijing cracks down on safety.
Prices shot to record highs last week, reaching 603 yuan a tonne ($90.62) amid concern about tightening output as the government launched sweeping safety checks across major producing province Shanxi after a fatal accident at a mine.
Investors have pushed prices up 50 percent this year, piling into the market with bullish bets as hotter than usual weather scorched the north, increasing electricity demand for air conditioning and hence demand for China's favourite fuel.
Now, as the heat wave passes and long-range forecasts point to a warmer than average winter in the world's top consumer of the fuel, analysts and sources at utilities and miners are speculating over whether pressure on prices will increase.
China's most actively trade thermal coal futures for delivery in January inched down 0.9 percent on Tuesday to close at 595.6 yuan a tonne.
"We see increasing risks of a correction in the thermal coal market, due to lower consumption from power companies and cooling temperature," said Zhang Min, analyst at China Sublime Information Group.
The forward structure of the thermal futures curve shows investors are betting on prices peaking in October before falling steadily until August 2018. October's premium over August was 73 yuan a tonne ($10.97).
Reflecting reduced appetite from power producers, inventories at China's largest coal trading port Qinhuangdao have been stable at about 600 million tonnes in August, up from critically low levels of 400 million tonnes in March.
That's double the level this time last year and above the average of recent years.
"Weak appetite from utilities and growth in hydropower production has dampened purchases of thermal coal," China Coal Industry Association said in a report on Monday. "Declining freight rates for seaborne coal also indicate weakening demand."
The uncertain outlook may unsettle large rival producers such as Australia and Russia, which have sold more coal to China over the past year and benefited from higher prices.
Still prices may not fall too far before finding support from falling output as China's government clamps down on safety. Coal output in July fell to its lowest since October.
A trader with one of China's top miners believes that prices will hover in their current range between 560 and 590 yuan.
Source: energy.economic times