Rising temperatures in China to weigh on coal prices

The heating demand season for thermal coal in northeast China, which typically ends in mid-April, is ending earlier than usual as temperatures rise to their highest levels so far this year. This will likely free up more coal for other parts of China and curb a recent increase in spot prices that has been supported by a post-lunar new year holiday industrial rebound.

Temperatures in most parts of China have begun to rise, but have risen by a more significant 10℃ in many of the country's northeastern regions, according to China's meteorological administration. Northeast China is an important coal consuming region because it typically experiences longer and colder winters compared with the rest of the country.

China experienced a severe coal shortage in December and January, when several of the country's price reporting agencies were told to cease publication of prices that rose to nearly double the government-set upper limit of 600 yuan/t ($92.08/t). The shortages were a result of domestic output failing to compensate for steep import curbs that were implemented last year. Prices of Chinese NAR 5,500 kcal/kg coal have since eased to Yn633.83/t fob Qinhuangdao, according to the latest Argus assessment on 19 March, after hitting an all-time high of more than Yn960/t in January, although a post-holiday industrial rebound that began earlier this month continues to support the market.

The diversion of coal supplies from northeast China to other parts of the country as heating demand weakens should weigh on spot prices, which is typically the case as the peak winter demand season ends, although multiple factors could mean this year may be different.

Summer stocks lower than previous years

Coal stockpiles at Qinhuangdao are significantly lower for the time of the year compared with previous years, which may have encouraged some coastal utilities to jump-start their summer restocking to secure cargoes, even as heating demand declines. Coal inventories at Qinhuangdao were at 5.29mn t yesterday, more than a 1mn t lower than on the same days in 2020 and 2019, respectively, according to data from coal industry association the CCTD.

A surge in international dry bulk freight rates since mid-February on rising bunker prices and strong Chinese grain imports has deterred some Chinese coastal utilities from buying seaborne coal for their summer requirements. Many Chinese coastal utilities are buying domestic coal ahead of the high demand summer season, despite high coastal freight rates, as international freight rates are significantly higher.

Coastal freight rates for 50,000-60,000t vessels delivering coal from China's key coal trans-shipment port of Qinhuangdao to the southern port of Guangzhou rose to Yn63.60/t yesterday. This was up from Yn53.10/t a week earlier and the highest since 18 January when China's coal shortages were at their peak, according to CCTD freight data. But the vessel queue at Qinhuangdao was at 53 yesterday, nearly double compared with a week earlier, despite the increase in freight rates.

The vessel queue at Qinhuangdao has surged despite the sharp increase in coastal freight rates, suggesting that some Chinese coastal utilities may be starting their summer restocking earlier than usual to avoid strong competition for limited cargoes, market participants said.

Australian disruptions to indirectly impact China

China's informal ban on Australian coal that has been in place since April remains in place. But tighter availability of Australian NAR 5,500 kcal/kg coal due to severe flooding in the country will have an indirect impact by narrowing the arbitrage window of non-Australian seaborne cargoes by pushing buyers in other markets such as India to compete for limited seaborne material, potentially raising spot prices. The reduced arbitrage as a result of higher prices will likely bolster demand from Chinese utilities for domestic coal, market participants said.

Severe flooding in Australia's Hunter Valley has restricted rail deliveries of thermal coal to Newcastle port. This, together with disruptions at Newcastle Coal Infrastructure Group because of a damaged shiploader, are expected to significantly reduce supplies.

The prospect of tighter Australian supplies coincides with announcements by leading Indian cement makers that they have resumed expansion plans. The Indian cement sector has been a key consumer of Australian NAR 5,500 kcal/kg coal since the second half of 2020 because of high petroleum coke prices. Limited availability of NAR 5,500 kcal/kg coal from South Africa and eastern Russia will mean that Indian consumers will have to compete with Chinese buyers for Indonesian coal. This could encourage Indonesian producers to raise prices, potentially deterring some Chinese utilities from purchasing seaborne coal.

By Kelvin Leong