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China’s coal output cuts a mixed blessing for global imports

Welcome to the Snapshot a series that examines the factors driving and shaping global commodity markets today.

Today we want to shine a light over why potential Chinese domestic coal production cuts are causing a wider rumpus in international thermal coal markets, and explore whether Chinese political intervention is a reliable driver of spot pricing.

Global thermal coal spot prices

Thermal coal was the surprise package in the commodity world last year, with Europe delivering spot prices which effectively doubled to over $90/metric ton before 2016 was out. A lot of that upward traction can be attributed to a very bullish Asian market in a low freight cost environment which sucked Colombian supply eastward.

Central to this rally was a directive by China’s economic planning body, the National Development and Reform Commission, reducing working days at Chinese coal mines by around fifth-teen percent to 276 days a year.

The move had two key objectives: to support the balance sheets of the mainly state-owned sector and to drive out inefficiencies by reducing consumption of lower grade coals. Combined with northern hemisphere winter restocking, this dragged up thermal coal prices as supply and demand rebalanced.

The Chinese cuts were relaxed later in the year, as the NDRC did not like the subsequent price spike that occurred, and that caused a tail-off in pricing as the year turned.

Asia-Pacific thermal coal prices YTD

More recently, Asian prices had been on an upward slant, with traders pointing towards speculation that the NDRC was about to reintroduce the 276-day rule as a potential game changer.

Now on the face of it, this seems a logical assumption to make – if Chinese domestic supply is restricted again, demand will likely turn to the import market again, and the chain reaction through global seaborne trade flows should work its way back to a tightening of European availability, right?

Well, this may be so but the NDRC has now officially stated it has no plans for large-scale coal output, seemingly allaying fears of the 276-day reinstatement. Our sources say the NDRC does not want to repeat the volcanic effect its intervention had on coal prices last year.

Having said that, prices are still rallying, amid depleting Chinese end-user stockpiles, mine safety checks apparently holding up domestic coal shipments, rising freight costs and news that some of the smaller miners are yet to reach full production after the Lunar New year. Then of course there’s the recent news that China intends to trim 150 million tons of annual production capacity by shutting old, inefficient mines.

The big question is whether the China effect will support and prolong that global rally or replicate last year’s price graph and dramatically slump after a sharp spike.

Until next time on The Snapshot, we’ll be keeping an eye on the markets.
Source: Platts

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