Chinese coal producers set floor price to halt slide

Major Chinese coal producers have set a floor price for domestic coal in a move to halt the aggressive and competitive price cuts they have been making since early this month. The decision for a floor price was made after oversupply and weaker power demand lowered coal prices more rapidly than expected.

China's major coal producers, including state-controlled China Energy Investment, China Coal, Datong and privately run Yitai, today set their prices for NAR 5,500kcal/kg coal at no less than 485 yuan/t fob north China ports for cargoes delivered over the rest of this month, according to market participants.

The floor price is above Argus' last assessment of Yn474.67/t ($66.88/t) fob Qinhuangdao on 17 April for NAR 5,500kcal/kg coal.

The move was made after major producers cut prices sharply and gave additional discounts to attract buyers. The CEI at the start of this month slashed the price of NAR 5,500 kcal/kg coal supplied in April by Yn26/t ($3.70/t) from March to 536 yuan/t fob Huanghua port ($75.50/t). CEI offered a discount of as much as Yn15/t to the contract prices for buyers that take large volumes, which lowered the discounted price to Yn521/t fob Huanghua port.

The futures market responded quickly to the news of the floor price agreement today, with the most actively traded September contract on the Zhengzhou commodity exchange touching an intra-day high of Yn502.80/t before closing at Yn499.80/t. This was up from the closing price of Yn498.60/t on Friday 17 April.

Domestic spot prices are likely to be supported by the producers' new floor price, after straight week-on-week falls since late February. The price of NAR 5,500kcal/kg coal of $66.88/t on 17 April was the lowest since 22 July 2016, according to Argus assessments.

Stable domestic prices could provide some support for coal imports, although China's tightening port restrictions could continue to curb the intake of foreign cargoes. Australian high-ash coal, which mostly heads for China, has also been struggling as a result of the fall in China's domestic prices. Argus assessed the price of NAR 5,500kcal/kg Australian coal at $47.88/t fob Newcastle on 17 April, the lowest since 30 August 2019.

Call for production cuts

China's influential government-backed coal transportation and distribution association (CCTD) over the weekend called for domestic coal producers to cut production to support prices and restore order to the market.

Producers should stop production when prices fall below their costs, the CCTD said. It also urged major producers not to give discounts or to dump their coal in the market. And it said producers should not deliver coal before they receive payment.

The CCTD has issued a letter to regional energy administrations that oversee coal mine operations in major coal-producing areas such as Shanxi province, Inner Mongolia region, Shaanxi province, Ordos county and Yulin county. It called on the administrations to forbid mines to produce more than their approved capacity. The CCTD suggested that the administrations analyse the operating rates at coal mines and coal consumers, and guide mines to adjust production schedules in accordance with demand to reduce the build-up in stocks.

But two major state-controlled coal producers told Argus today they are not planning production cuts yet in the hope that the market may improve. They probably fear losing market share and have bank loans to service. A dozen anthracite producers have called on the industry to slash output by 10pc from current levels.

The CCTD's call for production cuts was also to help improve the profitability of coal mines. Combined profits at domestic coal mining and coal washing companies declined by 46pc year on year in January-February, CCTD said citing data by the national bureau of statistics (NBS). Around 42pc of the companies made losses over this period.

Coal output rises

China's coal production increased by 9.6pc year on year to 337.26mn t in March, the NBS said. This marked the highest level since at least January 2015, largely a result of Beijing's push for mines to restart quickly while still taking measures to contain the spread of Covid-19.

The sharp rise in coal supply far outweighed the slower power demand, thereby dampening coal prices. China's power use for March fell on a weaker manufacturing and services sector, as the virus hit the economy. Total power consumption for China in March stood at 549.3TWh, down by 4.2pc from a year earlier, the National Energy Administration said.