Recent trends in Chinese demand for coal should be worrying international coal producers, according to a research from Bank of America Merrill Lynch (BoAML). A number of factors are combining to reduce demand for coal imports, further curbing demand in an already oversupplied market.
Domestic coal production is rising
Key to this is the drive to raise production at Chinese mines. Total thermal coal output in China has been creeping up since April, according to BoAML, and are now close to record seasonal highs. This has led to domestic oversupply with a 2.3 million t increase in coal inventories at Chinese ports since April. In total, inventories at powers, mines and power producers remain high at 300 million t in June.
Chinese coal prices are collapsing
As a result, domestic coal prices have collapsed in China, with prices for Chinese coal dropping faster than international benchmarks. Prices for 4900 – 5500 kcal/kg coal at Qinhuangdao are down by almost 10%, while Australian coal from Newcastle is down only 1%.
Adding to the downward pressure on prices, China’s coal producers are cutting prices to protect market share: “Shenhua and China Coal, for instance, has aggressively cut prices and have plenty of room to continue as their break-even costs are estimated to sit at 250 and 400 yuan/t compared to current spot prices of around 550 yuan/t,” say BoAML.
Domestic infrastructure is improving while the threat of an import ban remains
While China has always had the reserves to produce more coal, moving that coal from the remote coal mining provinces to where it is used in the populous coastal regions has long been proved problematic. But there are now signs that this is changing. BoAML expects rail capacity from Shanxi to increase by 130 million t this year and 70 million t next year. For the three major coal producing regions – Shanxi, Shaanxi and Inner Mongolia – rail capacity is expected to rise by 170 million t this year and 230 million in 2014. This will lower costs for domestic producers and allow more Chinese coal to access domestic markets.
At the same time, there is the ongoing threat of a ban on imports of low quality coal. This led to drop in lignite imports when announced, but had since been postponed to at least 2014 after an outcry by power companies.
A drop in demand?
The Chinese Government also has coal-fired generation in its sights, setting a target to cut total coal consumption in an effort to improve air quality. According to Reuters, the government wants to cut coal’s share in the electricity mix to below 65% from 2017. As part of this, it will stop approving new thermal power plants in key industrial areas, e.g. the Beijing-Tianjin-Hebai region in the north and the Yangtze and Pearl River delta regions in the east and southeast.
The Chinese government is also aiming to establish regional carbon trading schemes as pilots for a national scheme that could – if successful – further moderate coal demand. An integrated national carbon trading scheme may be a long way off, but the moves to establish one further points to a more general trend by the government to limit the country’s reliance on coal for power.
Times, they are a changing
Underlying all of this is a structural change in the Chinese economy from one based on industrial activity to one based on services and consumption. In the long term, this is likely to weigh on demand for coal-fired power, slowing growth in thermal coal consumption. BoAML expects growth in coal consumption to slow to 4.5% this year, down from 6.4% last year and 9.4% in 2011. Far from an end to coal in China: but a warning perhaps to international suppliers not to take the Middle Kingdom’s appetite for coal for granted.
Written by Jonathan Rowland
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