China’s Coal: G-20, Weather, and Manipulation – 9/20/16

Though a perfect storm of events in China’s coal world has sent coal prices higher, the clouds will likely pass as quickly as they came.

China’s coal imports rose 52% in August from a year earlier, customs data showed. An apparent shortfall of coal output in the country has helped send thermal coal prices up 40% since 2016 began. Chinese leadership has been pushing reforms of an industrial sector bloated with overcapacity, but the shortfall was still surprising to many.

coal-rebounds

Yet, many of the factors causing the rise in imports are temporary and/or artificial, having no permanent on supply.

Before the G-20 meetings in September, Beijing ordered temporary factory shutdowns to alleviate air pollution. Then you have the bad weather that caused heavy flooding earlier in the summer also disrupting supply chains for coal mines, which have already had their operating days reduced. And over in India, Coal India Ltd., the world’s biggest miner of the fuel, reported its lowest output in three years on the heavy rains and protests. None of these factors will have a lasting effect on the fundamental supply of coal.

The rising price of coal does not mean coal demand is making a lasting rebound either.

The temperate weather of Fall is right around the corner to cut into electricity demand, and alternative sources of power are growing much faster than coal on falling costs and rising government support. Now that China has committed to the Paris Agreement, its encouragement of low-carbon sources of energy will probably only increase.

More significant for the long-term price of coal, Chinese officials appear to be targeting a price range for thermal coal.

Regulators and miners agreed this week to coordinate production. The agreement shows officials are aiming for Bohai-Rim coal to rest between of 450 yuan to 500 yuan a ton. This week, the price was around 554 yuan, according to CCTD. The price range, maintained by cuts or increases in output by miners, is apparently meant to drive down overcapacity by forcing inefficient miners out of the market.

All in all, coal is still in rough spot. Regardless of political manipulations, cheap natural gas and concerns about climate change are beating down demand for the fuel and, unlike bad weather, those won’t just fade away.

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