Wood Mackenzie analysis: NDRC intervention prompts Qinhuangdao port's capping of thermal coal prices

According to the leading research and consultancy business for the global energy, chemicals, metals and mining industries, the price cap will have an impact from now until mid-March. Demand for thermal coal will fall in February during the Chinese New Year holiday but supply will also fall for the same reason. After the holiday period, demand will quickly return and restocking by generation companies (gencos) will add additional demand. Without the price cap, thermal coal prices at Qinhuangdao port for 5500kcal/kg coal are not expected to drop below RMB750/t (FOB) until the middle of March, when the need for heating coal disappears.

The price cap will be difficult to implement. The measure impacts thermal coal prices, but it is only the power industry that has called for coal prices to be restricted. As electricity tariffs are fixed, high coal prices resulted in big losses for the gencos in 2017. Non-power industries are not so bothered by coal price fluctuations as their product prices are market-driven and can adapt accordingly. For example, the cement industry increased its prices by over 30% in the second half of 2017. As the NDRC has asked railway operators to prioritise transporting coal for power use in the winter, stability of supply is more important than price to non-power industries. So even if the NDRC caps coal prices, non-power coal users will be prepared to pay more to miners or traders to receive their supply.

The price cap will have a greater impact after the Chinese New Year holiday. With the national holiday starting on 15 February, spot coal purchases are currently limited. However, once the holiday period is over, Wood Mackenzie predict that thermal coal demand will rapidly return to normal, especially since gencos have very low inventories. For example, the six largest coastal gencos only have coal stocks to last for around 10 days of consumption. Last year, restocking demand caused a rise of more than RMB100/t after the Chinese New Year holiday. We don't expect the NDRC will tolerate prices rising above RMB800/t this year. We believe the NDRC wants to pilot this price cap mechanism before the Chinese New Year so that only a small volume of high-priced coal is impacted. It will then take what it has learned from this pilot to try to stabilise the market if there is a large gap between supply and demand after the holiday.

According to Wood Mackenzie, over the past few years China's coal market has increasingly become policy-driven. Supply-side reform, stringent environmental restrictions on production, transportation and consumption of coal, and frequent government intervention in price-setting are puzzling market participants and investors alike. This may be a key reason why the price management scheme introduced last year has not been very successful and supply recovery remains muted. Time will tell how successful raising the scheme's upper boundary of RMB600/t by 25% will be in controlling volatility and stabilising the market. Meanwhile, seaborne suppliers will continue to benefit from China-driven high prices.

Read the article online at: https://www.worldcoal.com/coal/09022018/wood-mackenzie-analysis-qinhuangdao-portcaps-thermal-coal-prices-following-ndrc-intervention/