China Rushes to Boost Coal as Rally Warns: Winter
Post# of 51865
Posted On: 10/05/2016 4:59:31 PM
China Rushes to Boost Coal as Rally Warns: Winter Is Coming
Government relaxing mining restrictions after prices surged
Thermal coal prices jump 50% as output falls by a tenth
China’s efforts to shrink its bloated coal industry may have worked too well, too fast.
Prices have surged more than 50 percent this year after the government ordered miners to cut output to ease a glut and help lift the industry out of crisis. Now, as winter looms and fuel demand peaks, the consumer and producer of about half the world’s coal is having to relax some of those controls, or face even higher fuel costs, according to analysts at Citigroup Inc. and ICIS China, as well as China Coal Transport and Distribution Association.
“The extent of the production cuts earlier this year has been too severe,” David Fang, a director with the CCTD, said by phone. “Now the government is trying to fix the problem by relaxing some controls on output, but there is only limited time now before the winter arrives.”
The government earlier this year unveiled efforts to revitalize the coal industry and throw a lifeline to miners, many of them government-controlled, who struggled to repay debts as prices of the fuel used in power stations fell to the lowest in about a decade amid excess supply.
President Xi Jinping’s administration ordered miners to lower output to the equivalent of 276 days of production, from the standard 330 days. And as part of the country’s broader “supply side structural reform,” regulators went after the industry’s massive overcapacity, cutting about 150 million tons of unneeded capacity as of August, out of a target of 500 million tons by 2020.
Fine Tuning
The reforms may be a victim of their own success. Output fell more than 10 percent in the first eight months of this year, pushing up domestic prices and helping imports, including coking coal used to make steel, rise to the highest since December 2014.
Now, policy makers are trying to fine tune the approach and have intensified efforts to bring some production back. One week after allowing some miners to raise output by 500,000 metric tons a day last month, the National Development Reform Commission, the country’s top planner, met again to discuss the possibility of increasing it to 1 million tons.
“We need to balance our efforts in cutting overcapacity and ensure stable supply,” the NDRC said in a statement Sept. 23. “The severe overcapacity in the coal sector hasn’t changed. We shouldn’t weaken our efforts in reducing the glut. Otherwise, it will be hard to get the coal industry out of difficulty.”
Getting It Right
The policy of capping mining output at the equivalent of 276 days of production has also been relaxed for some producers. The NDRC is also allowing selected “advanced” and “high efficiency” miners to raise production from Oct. 1 to Dec. 31, the China Economic Herald reported Thursday, citing an NDRC official whom it didn’t identify.
Benchmark coal prices are soaring. The cost of deliveries at the port of Qinhuangdao rose last week to about 565 yuan ($84.70) a ton, the highest since Jan. 2014, while Bohai Rim prices are up more than 50 percent from the beginning of the year. Australia’s Newcastle coal, a benchmark in Asia, rose 2.5 percent to $83.15 a ton on Tuesday, up 64 percent for the year.
And the rally may not be done. Thermal coal could rise 10 percent more by the end of the year because of winter demand, Deng Shun, an analyst with ICIS China, said before the latest efforts were unveiled to ease supply restrictions.
The new policies may add as much as 1.4 million tons extra to the daily coal production boost, Citigroup analyst Jack Sheng wrote in an Oct. 2 report. Prices may “normalize” this quarter and average 475 yuan a ton in 2017, he wrote. Idled mines take about three months to restart, meaning the impact on thermal coal prices won’t be immediate, BMI Research said in a note Wednesday.
The NDRC didn’t respond to a faxed request for comment on Wednesday. Government offices are closed all week for a public holiday.
If supply isn’t allowed to expand over October and November as it normally does, China may have to suspend loss-making coal-fired power generating capacity because of high prices or a lack of coal, Morgan Stanley analysts including Tom Price wrote in a Sept. 26 report. A pre-winter supply surge will be bearish for prices, they wrote.
“China will allow enough mines to operate at higher utilization rates to rebalance the market,” Andrew Driscoll, head of resources research at CLSA Ltd., said by phone. “Production quotas don’t usually work, but I think China will get this right. You don’t want to bet against Beijing.”
Government relaxing mining restrictions after prices surged
Thermal coal prices jump 50% as output falls by a tenth
China’s efforts to shrink its bloated coal industry may have worked too well, too fast.
Prices have surged more than 50 percent this year after the government ordered miners to cut output to ease a glut and help lift the industry out of crisis. Now, as winter looms and fuel demand peaks, the consumer and producer of about half the world’s coal is having to relax some of those controls, or face even higher fuel costs, according to analysts at Citigroup Inc. and ICIS China, as well as China Coal Transport and Distribution Association.
“The extent of the production cuts earlier this year has been too severe,” David Fang, a director with the CCTD, said by phone. “Now the government is trying to fix the problem by relaxing some controls on output, but there is only limited time now before the winter arrives.”
The government earlier this year unveiled efforts to revitalize the coal industry and throw a lifeline to miners, many of them government-controlled, who struggled to repay debts as prices of the fuel used in power stations fell to the lowest in about a decade amid excess supply.
President Xi Jinping’s administration ordered miners to lower output to the equivalent of 276 days of production, from the standard 330 days. And as part of the country’s broader “supply side structural reform,” regulators went after the industry’s massive overcapacity, cutting about 150 million tons of unneeded capacity as of August, out of a target of 500 million tons by 2020.
Fine Tuning
The reforms may be a victim of their own success. Output fell more than 10 percent in the first eight months of this year, pushing up domestic prices and helping imports, including coking coal used to make steel, rise to the highest since December 2014.
Now, policy makers are trying to fine tune the approach and have intensified efforts to bring some production back. One week after allowing some miners to raise output by 500,000 metric tons a day last month, the National Development Reform Commission, the country’s top planner, met again to discuss the possibility of increasing it to 1 million tons.
“We need to balance our efforts in cutting overcapacity and ensure stable supply,” the NDRC said in a statement Sept. 23. “The severe overcapacity in the coal sector hasn’t changed. We shouldn’t weaken our efforts in reducing the glut. Otherwise, it will be hard to get the coal industry out of difficulty.”
Getting It Right
The policy of capping mining output at the equivalent of 276 days of production has also been relaxed for some producers. The NDRC is also allowing selected “advanced” and “high efficiency” miners to raise production from Oct. 1 to Dec. 31, the China Economic Herald reported Thursday, citing an NDRC official whom it didn’t identify.
Benchmark coal prices are soaring. The cost of deliveries at the port of Qinhuangdao rose last week to about 565 yuan ($84.70) a ton, the highest since Jan. 2014, while Bohai Rim prices are up more than 50 percent from the beginning of the year. Australia’s Newcastle coal, a benchmark in Asia, rose 2.5 percent to $83.15 a ton on Tuesday, up 64 percent for the year.
And the rally may not be done. Thermal coal could rise 10 percent more by the end of the year because of winter demand, Deng Shun, an analyst with ICIS China, said before the latest efforts were unveiled to ease supply restrictions.
The new policies may add as much as 1.4 million tons extra to the daily coal production boost, Citigroup analyst Jack Sheng wrote in an Oct. 2 report. Prices may “normalize” this quarter and average 475 yuan a ton in 2017, he wrote. Idled mines take about three months to restart, meaning the impact on thermal coal prices won’t be immediate, BMI Research said in a note Wednesday.
The NDRC didn’t respond to a faxed request for comment on Wednesday. Government offices are closed all week for a public holiday.
If supply isn’t allowed to expand over October and November as it normally does, China may have to suspend loss-making coal-fired power generating capacity because of high prices or a lack of coal, Morgan Stanley analysts including Tom Price wrote in a Sept. 26 report. A pre-winter supply surge will be bearish for prices, they wrote.
“China will allow enough mines to operate at higher utilization rates to rebalance the market,” Andrew Driscoll, head of resources research at CLSA Ltd., said by phone. “Production quotas don’t usually work, but I think China will get this right. You don’t want to bet against Beijing.”
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