August 28, 2013 / 9:06 AM / in 4 years

Chinese coal price war to dampen coal imports

5 Min Read

* China domestic coal prices down 14 pct this year

* Jefferies sees prices falling further -analyst

* Coal stocks at 300 mln T, 11 pct higher than year ago

By Fayen Wong

SHANGHAI, Aug 28 (Reuters) - China's major coal producers have been slashing domestic prices since July to gain market share, in a move likely to slow import growth for the rest of the year as overseas shipments become less attractive in the top buyer and producer of the fuel.

Local coal prices have already dropped 14 percent so far this year and could drop further, even as a recovery in the world's second-biggest economy supports thermal coal consumption, traders and analysts said. China usually imports only when overseas coal is cheaper than domestic supply.

Although plans to increase infrastructure investment could also lift coal consumption, efforts to shut plants in sprawling power-intensive industries, such as cement, steel and aluminium, could also partly offset any demand growth, they said.

"The industry is still in a phase where major producers are cutting costs to displace marginal producers and that will keep driving down coal prices," Laban Yu, an analyst at investment bank Jefferies, said in a note this week.

"The market is calling a bottom. We are not," Yu said. Jefferies says prices will not hit bottom for another year.

Pricing pressures have already slowed China's coal import growth to less than 14 percent in the first half of 2013, down from a jump of nearly 30 percent in the first quarter.

To boost sales and grab market share, top producers Shenhua Energy and China National Coal Group have been cutting their spot thermal coal prices since July.

China's spot coal prices have dropped 9.3 percent since June to hit a four-year low of 546 yuan ($89.19) this week, even though a record hot summer pushed July power consumption growth to its highest this year.

About 10 percent of China's thermal coal producers have a break-even cost of around 500 yuan a tonne, analysts said, giving major miners plenty of room to keep cutting prices.

Shenhua has the lowest production cost in China at about 250 yuan per tonne including taxes, analysts and traders said. China Coal's production costs are about 400 yuan a tonne.

Shenhua Chairman Zhang Xiwu said on Monday that he expected domestic coal prices to "continue sliding towards the end of the year due to unfavourable economic conditions."

Inventories Piled Up

Low prices have already forced some miners to cut output, with total production in the first seven months down 3.5 percent on year to 2.13 billion tonnes.

But with inventories of around 300 million tonnes piled up across the country, about 11 percent higher than a year ago, analysts at Japanese investment bank Nomura have said China's output needs to fall 8-10 percent to restore market balance.

And many miners are reluctant to pare production, worried they could lose market share and that banks might pull back credit.

China's coal consumption in the first six months of the year rose 1.8 percent from a year ago to 1.93 billion tonnes.

That was higher than first-half coal output of about 1.8 billion tonnes, but with the ample supply, prices were not getting much of a lift.

Although inventories at six major power plants have fallen to an average of 15.4 days of consumption, the lowest this year, sources at power utilities said there would be no scramble to restock.

"We used to keep 17-20 days of stock because supply was tight. But we've lowered the threshold to about 14 days because there is plenty of coal, so there is no need to tie up our cash," said a procurement manager at a large power station.

In July, coal imports excluding lignite rebounded and rose more than a quarter from June after two months of falls in shipments, as lower overseas prices led end-users to order more Australian coal to restock for peak summer demand.

But major Chinese miners have extended credit periods to buyers, reduced deposit requirements, and are allowing adjustments to contract prices so they more closely reflect spot rates at the time of delivery, utility sources said.

"It is increasingly difficult to price coal into China. For local buyers, it is very risky to book shipments in advance when domestic prices keep falling," said a Singapore-based trader.

$1 = 6.1217 Chinese yuan Additional reporting by Charlie Zhu; Editing by Tom Hogue and Ed Davies

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