Thermal Coal Demand in China Drives Price Increases
Source: MetalMiner, Stuart Burns (10/12/09)
". . .contrary to many other commodities, both metals and energy that hit bottom in early 2009 have been rising since."
China is the world's largest producer and consumer according to China Coal Resources. Coal producers and consumers have been locked in negotiations over the contract price, which has made producers cautious about raising production; so consumers have turned to the international market and imports soared in Q2 to 16.1m tons per month as power production has risen. Since then, imports have dropped in July to 13.9m tons and again to 11.774m tons in August but stocks at ports are still relatively low and electricity production is up for the year as the country enters the colder peak winter months. This compares to a monthly average of 3.4m tons in 2008.
To what extent China will maintain this level of consumption and in particular imports remains to be seen. China Coal Resources predicts demand will remain strong due to continued industrial growth and the coming winter months of peak demand, but some observers believe the fading effects of the H1 stimulus package will reduce demand across the economy. Power station stocks are said to be lower now than in the Q2 so unless the domestic producers raise production and reduce prices to compete with imports it is unlikely China demand on regional suppliers is going to diminish significantly in the Q4.
After falling steadily this year, global spot prices climbed in mid-September reflecting the strong demand. Recently, China's Ministry of Finance unveiled measures to release special funds to support the shutdown of small coal mines. Local governments will get financial support from the central government to speed up the rationalization and closure of small mines notorious for their poor safety record. The remaining state mines will then be able to consolidate their hold on the domestic thermal coal market around the whole country. Their primary focus will be to maximize returns, which means they will aim to keep both capacity utilization and prices optimized. Imports will therefore probably remain robust and on the back of that, Asian prices for thermal coal can be expected to rise during the winter.