Newcastle coal prices plunge 30% on Chinese cues

Subramani Ra Mancombu | | Updated on: Nov 01, 2021
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China steps up measures to boost output; cracks the whip on traders, speculators


Newcastle coal prices, a benchmark for the global market, dropped by over 30 per cent on Monday following a steep decline in the Chinese prices that witnessed their biggest weekly fall in five years last week following a government crackdown.

Fitch Solutions Country Risk and Industry Research (FSCRIR) said following the Xi Jinping government’s crackdown on coal, traders have been dumping stocks to avoid losses as prices have embarked on a free fall since October 21.

Policy intervention

Dutch multinational investment and financial banker ING’s economic and financial analysis arm Think said strong policy intervention from Chinese policymakers has sent thermal coal prices into a free fall.

In addition, the Chinese National Development and Reform Commission (NDRC) officials inspected the Zhengzhou Commodity Exchange (ZCE), and cracked the whip on speculative bets in thermal coal futures.

On its part, the exchange raised the trading limit on thermal coal contracts to 10 per cent and imposed limits on some members’ trading positions. Chinese officials also visited coal storage sites to crackdown on hoarding and unlicensed coal storage in key production regions and ports.

At the time of filing this report, Newcastle coal futures for November were quoted at $150 a tonne, December at $155 a tonne and January at $142. Prices of coal that had hit a high of $269.50 a tonne on October 5 have now dropped by 42.5 per cent. During the weekend, the contracts ruled over $220.

Up 166% y-o-y

According to Trading Economics website, coal prices have lost 29 per cent over the past month, though they are up 166 per cent year-on-year. Coal prices have begun losing steam in China after the Jinping government said there was further scope to lower the energy commodity prices.

The NDRC, which is trying to boost coal supplies and tackle the country’s energy crisis, said in a statement last week that coal production costs were much lower than current spot coal prices.

At ZCE, the most traded coal contract declined to 917.60 yuan ($143.44) a tonne on Monday. Spot coal prices are now expected to slip in line with the futures trend.

According to FSCRIR, a Fitch group unit, Chinese as well as global thermal coal prices are expected to ease further in the coming months.

Power crunch abating

“We are seeing some early signs of the power crunch in China abating on the back of a range of government intervention in the domestic coal mining and trading sector. We had previously expected China’s severe power shortage to be temporary, noting that the Chinese government would attempt to ensure energy security before the winter heating demand kicks in,” the ratings agency said in a note.

“Coal prices have come under pressure, with the Chinese government taking action to increase domestic supply and cap prices,” ING Think said.

Fitch Solution said signs of an easing in the power crunch are visible, with an apparent withdrawal of speculative bets in the metals markets, it said.

More fall on cards

FSCRIR said Chinese prices are expected to continue easing in the coming months, along with global coal prices. “We believe the government’s intervention to ease the country’s severe energy crisis is working to bring the situation under control, with a number of provinces easing power rationing and lifting caps on power consumption,” it said.

The NDRC announced a slew of measures to be undertaken and started enacting them from early October, with the latest being a crackdown on coal hoarding and speculative trades, Fitch Solutions said.

Since September-end, NDRC has also approved production at a number of previously shut coal mines, allowing a release of emergency reserve capacities. Coal-fired power stations that had temporarily halted operations have also quickly resumed operations.

On the other hand, the Jinping government ordered the local governments to maintain production at full capacity from coal mines during holidays and major events. They were forbidden from halting production without approval.

Rise in output

As a result of the slew of Chinese measures, the average daily production has increased by over 1.2 million tonnes (mt) and on October 18 the output hit a 2021 record at over 11.6 mt. Chinese power plants now have stocks to produce power for 16 days from less than two days’ inventories at the start of October.

Quoting reports, Fitch Solutions said China is also planning to place price ceilings on thermal coal sold from domestic mines until May 2022 in order to ease the pressure on power plants.

The NDRC is also studying a new mechanism to guide coal prices within a reasonable range over the long term, FSCRIR said.


Published on November 01, 2021

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