Weakness in China's thermal coal prices may prompt government action: sources

Singapore — The recent sharp decline seen in Chinese domestic thermal coal, caused by the price competition of imported coal amid oversupply, have raised alarm bells within the Chinese government agencies as domestic thermal coal prices have moved into the "red zone", potentially signaling an intervention in the form of stricter port policies, market sources said.

Stricter port policies have also directly affected the Chinese metallurgical coal buyers' ability to pick up more spot cargoes, sending prices on a downward spiral.

The government agency, National Development Reform Commission, or NDRC, has signaled its intention to intervene in the market if Qinhuangdao 5,500 kcal/kg NAR spot prices trades lower than Yuan 470/mt FOB -- its red zone -- for a prolonged period of time, sources said.

Spot trades for 5,500 kcal/kg NAR grade of Chinese domestic coal move into the red zone, to Yuan 460-465/mt FOB Qinhuangdao [$64.98-$65.84/mt] late Thursday, down Yuan 10/mt on week. This was led by a decline in demand for both seaborne and domestic Chinese thermal coal, coupled with intensifying price competition from seaborne thermal coals.

"China's NDRC said it will ensure prices return to the blue zone of Yuan 470-500/mt FOB Qinhuangdao," said one market source. Ideally, prices should hover in the green zone with a range of Yuan 500–570/mt FOB Qinhuangdao, the source added.

It is uncommon to see the Chinese government intervening in the domestic thermal coal market to protect domestic miners' profit margins, when prices slip to undesirable levels.

Policy intervention could come in the form of restricting coal imports, market participants said. Port related policies have evolved since April 2018 that includes introducing monthly quota at key ports, slowing down customs declaration, disallowing ships to discharge before declaration, restricting the counterparties allowed to make customs declaration and designating a fixed timing to discharge cargoes.

From January-March, China imported 95.8 million mt of coal, up 28.4% compared to the same period last year, China's General Administration of Customs reported earlier.

Coking coal imports impacted

As China looks to protect domestic miners' profits by curtailing import volumes, it has impacted metallurgical coal imports into China, which takes up a mere 24.6% of China's 2019 imported coal volumes.

According to S&P Global Platts Analytics, China imported 299.8 million mt of coal, of which 225.8 million mt were thermal coal and the rest were metallurgical coal.

The Platts Premium Low Vol CFR China price fell more than 20% since the since the start of April as spot market was swamped with supply directed to clearing market, China. This was particularly pronounced in the Australian Premium Mid Vol segments as term customers globally pushed back their tonnages in light of production cuts brought about by the coronavirus pandemic.

However, the restrictive Chinese import policy has dampened Chinese buyers' ability to absorb the excessive spot cargoes. The price arbitrage between domestic-seaborne premium low vol materials was assessed at a record high of $56.94/mt on April 29, the highest since the launch of the Met Coal PLV Import-Shanxi CFR China differential in September 2016.

Metallurgical coal sources expressed concerns that spot prices could move even lower should port related policies become even stricter. "Buying interest would be hampered if end-users think it is too challenging to get approvals," an end-user said.

From January-March, China imported 20.80 million mt of metallurgical coal, up 26.71% compared to the same period last year, latest customs statistic data showed.