China’s top planning body has made formal its previous decision to relax coal production curbs over the northern winter to try and put pressure on surging prices, especially of thermal coal.
In the face of rising prices, the Commission has restored 54 working days it had previously cut from the total that domestic mines are allowed each year in an effort to cut unprofitable production (around 300 million tonnes a year).
China’s National Development and Reform Commission published a directive yesterday raising the number of working days for coal mines to 330 after having cut that number to 276 earlier this year.
The new total applies until the end of the upcoming so-called winter heating period, which started on Tuesday and runs to March 15, 2015.
The previous cut had been intended to reduce China’s chronically bloated coal industry to better enable it to repay debt (much of it to Chinese governments and banks). But reducing output drove up coking (steel-making) and thermal (power generation) coal prices dramatically, catching buyers off guard, especially steelmaker.
That helped push the price of Australian hard coking coal (high quality) up past $US300 a tonne – a trebling in 9 months, while the price of Australian thermal coal more than doubled to around $US111 a tonne last week (and $US106 a tonne this week.
At a meeting last week it signalled this move, as well as revealing two contracts between Chinese thermal coal producers and power companies that contained a fixed price 25% below the market price for steaming coal in China – a highly unusual move.
Commission officials complained that moves started to boost output in late September had not been picked up by coal companies. It would seem the Chinese government is frightened of a coal shortage for the winter, meaning higher prices for coal and for power (coal is still the major electricity generating energy source in China).
While this price surge has been happening, China has stepped up imports (after it looked at the start of the year that imports would fall again in 2016, following a sharp fall in 2015). Instead exports have topped 201 million tonnes in the first 10 months of the year.
That’s up 18% and not far short of the 204 million tonnes imported for all of 2015 (which was down 30% from 2014). Domestic production though fell 1.5% in October from September and down 12% from the same month in 2015.
In the first ten months of the year, China produced 2.74 billion tonnes of coal, down 11% from a year earlier, according to the monthly data from the country’s National Statistics Bureau yesterday for October.
Those 800 mines were free by mid October to expand production, but few have. So last week, Reuters, the Financial Times and some industry newsletters reported that China’s peak policy body, the National Development and Reform Commission went further that the relaxing of production curbs at the 800 mines, and started mass meeting with mine owners to spur them into action.
So last Wednesday’s announcement two of China’s top coal miners signed long-term supply contracts with a utility at a quarter below current spot rates (http://www.globaltimes.cn/content/1016993.shtml). Shenhua Group and China National Coal group struck supply contracts longer than a year, priced at a discount to the prevailing Chinese domestic spot price. Unlike other contracts, which have flexible, market linked prices, these contracts have a base price of 535 yuan (or $US78.87), under the benchmark price for China of 585 yuan, according to local media reports last Wednesday.
The NDRC also resorted to that hoary bogeymen of centrally planned economies – hoarders and those providing false information (two pet subjects of the Chinese Communist Party).
Many of the alleged hoarders are companies owned by provincial or local governments, so the investigation will see individual managers blamed and not the companies (and their government owners). The government is more sensitive about thermal coal prices because of its importance as a source of energy for the electricity industry, which affects more consumers than higher steel prices do (hard coking coal is used in steelmaking).
Chinese steel prices have more than doubled this year for some types used in construction and infrastructure. It is much harder to put up power costs without adding to inflation or the cost of living for hundreds of millions of people and small and medium businesses.
The NDRC (i.e. the Chinese government) has turned its fire on this touchy subject to the main information provider for pricing in Shanxi province, China’s biggest coal mining province.
According to international and local reports, the Commission says it is now investigating an unnamed company for “problems” in its data. Reuters reported that a company called FenWei Energy, a Shanxi-based coal data company, last week suspended its spot physical thermal coal price index – used as the domestic industry benchmark – saying its prices did not reflect the majority of business transacted in the country.
This will force Chinese coal miners and consumers to use official pricing information to make future deals – which is what the NDRC wants to happen to take some of the heat out pricing.
Led by coal, commodities are surging (The Reserve Bank’s Commodity Price Index, which includes iron ore and coal, unlike some other well known measures) is up more than 20% in the 10 months to the end of October. Coal prices have more than doubled for thermal (steaming coal) to around $US109 a tonne and coking (steelmaking) coal more than trebled to a reported $US307 a tonne. Any number of factors are being nominated as contributing – China’s output curbs, production problems in Australia, higher demand for electricity in China in recent months and even the election of Donald Trump (but people who just don’t know).
But look for the Chinese to add a spanner in the works of budget fantasy (such as we saw from the The Australian yesterday about how Trump’s impact on commodity prices could add $10 billion to the budget). The Chinese government has already started undermining commodity prices, especially thermal coal and will prick the boom sooner than a lot of local Trumpians think. They have already made a concerted attack on the coal price boom and copper and iron ore will follow, judging what is happening on Chinese futures markets.
The best explanation is a combination of the coal output curbs in China, rising demand for electricity (consumption rose 4.8% in the first 10 months of this year against a rise of less than 1% for the same period of 2015), allied to rising speculation by Chinese speculators looking for ways to trade the yuan-US dollar relationship without having to go through banks and markets overseen by the Chinese central bank and other authorities (the same thing is happening in iron ore, copper, aluminium, zinc and nickel markets).
But the surge has startled the Chinese government and since the end of September, it has been trying to put a lid on the price by relaxing those production curbs on Chinese mines – to no avail. Prices have risen from around $US200 a tonne for high quality Australian coking coal, to more than $US300 million. Eight hundred (yes, 800) Chinese coal mines have been allowed to lift production
While this price surge has been happening, China has stepped up imports (after it looked at the start of the year that imports would fall again in 2016, following a sharp fall in 2015). Instead exports have topped 201 million tonnes in the first 10 months of the year. That’s up 18% and not far short of the 204 million tonnes imported for all of 2015 (which was down 30% from 2014). Domestic production though fell 1.5% in October from September and down 12% from the same month in 2015. In the first ten months of the year, China produced 2.74 billion tonnes of coal, down 11% from a year earlier, according to the monthly data from the country’s National Statistics Bureau yesterday for October.
Those 800 mines were free by mid October to expand production, but few have. So last week, Reuters, the Financial Times and some industry newsletters reported that China’s peak policy body, the National Development and Reform Commission went further that the relaxing of production curbs at the 800 mines, and started mass meeting with mine owners to spur them into action.
So last Wednesday’s announcement two of China’s top coal miners signed long-term supply contracts with a utility at a quarter below current spot rates (http://www.globaltimes.cn/content/1016993.shtml). Shenhua Group and China National Coal group struck supply contracts longer than a year, priced at a discount to the prevailing Chinese domestic spot price. Unlike other contracts, which have flexible, market linked prices, these contracts have a base price of 535 yuan (or $US78.87), under the benchmark price for China of 585 yuan, according to local media reports last Wednesday. Global prices are priced off the futures price for Newcastle coal which fell to #US109.85 on Friday from $US11.40 set last Tuesday. The NDRC also resorted to that hoary bogeymen of centrally planned economies – hoarders and those providing false information (two pet subjects of the Chinese Communist Party).
Many of the alleged hoarders are companies owned by provincial or local governments, so the investigation will see individual managers blamed and not the companies (and their government owners). The government is more sensitive about thermal coal prices because of its importance as a source of energy for the electricity industry, which affects more consumers than higher steel prices do (hard coking coal is used in steelmaking). Chinese steel prices have more than doubled this year for some types used in construction and infrastructure. It is much harder to put up power costs without adding to inflation or the cost of living for hundreds of millions of people and small and medium businesses.
The NDRC (i.e. the Chinese government) has turned its fire on this touchy subject to the main information provider for pricing in Shanxi province, China’s biggest coal mining province. According to international and local reports, the Commission says it is now investigating an unnamed company for “problems” in its data. Reuters reported that a company called FenWei Energy, a Shanxi-based coal data company, last week suspended its spot physical thermal coal price index – used as the domestic industry benchmark – saying its prices did not reflect the majority of business transacted in the country.
This will force Chinese coal miners and consumers to use official pricing information to make future deals – which is what the NDRC wants to happen to take some of the heat out pricing.
Chinese and foreign analysts say unless there is a surge in coal production this month, the expected upsurge from the 800 mines won’t emerge until March because the winter col freezes water supplies in at mines in northern provinces such as Shanxi and Shanxxi cutting production until the thaw sets in in late February-early March. That means the current high prices for thermal coal at least will remain for another three or four months. Controlling high quality coking coal price harder and much of the 201 million tonnes of imports so far this year have been for the steel industry.
