August 29, 2012 / 9:01 PM / 7 years ago

Output cuts help steady China's coal prices, outlook

* July coal output in top 3 regions down 10 pct from May

* China coal production to fall further to meet govt target

* Coal inventories fall from June peak, prices stabilise

By Fayen Wong

SHANGHAI, Aug 30 (Reuters) - Aggressive production cuts and a hot summer have helped shrink China’s main coal stockpiles by about 14 percent in the last two months, shoring up prices that have fallen by a fifth over the same period and signalling the worst may be over for the sector.

China is the world’s top producer and importer of coal, and stable domestic coal prices will help put a floor under benchmark regional prices, which have been lolling at two-year lows of 626 yuan ($98.50) a tonne since end-July.

Chinese demand, however, will stay weak and that may affect the profits and development plans of mining giants such as BHP Billiton and Xstrata, which have already taken a hit as China’s economic growth and appetite for resources decline.

Stocks at power plants fell to 85 million tonnes in August from 97 million in June, while inventories at seven major ports declined to 18.5 million tonnes from 24 million tonnes, top coal miner Shenhua Energy said.

“I think the days of sharp and steady falls in prices are over,” said David Fang, director at the China Coal Transport and Distribution Association (CCTD), an independent industry group.

“The market has stabilised but it might take a few months before prices recover. Even when they do, we won’t be seeing big gains because the economy is weak.”

MORE COAL THAN CHINA CAN BURN

Record high output in the first half of the year and a surge in imports created mountains of coal at China’s ports and power plants just as demand waned as the manufacturing-led economy grew at its slowest pace in three years.

China imported 133 million tonnes of coal from January to July, a 52 percent year-on-year increase, while production from the three provinces that account for almost two-thirds of the total output hit a six-month high of 217 million tonnes in May.

By June, total coal stocks across China’s main depots and mines were a record 380 million tonnes, almost a third higher than a year ago and equivalent to one month’s consumption, CCTD data shows.

Combined with weak demand, the supply glut led China’s thermal coal prices to fall for 13 consecutive weeks.

Prices steadied at the start of August after miners in top producing regions Inner Mongolia, Shanxi and Shaanxi cut output to 196.3 million tonnes in July, a 9.5 percent decline from May.

A hot summer also meant coal stocks at power stations fell by an average 5 percent a week during July and early August, contributing to the overall decline.

Coal stocks are likely to fall further until the end of the year as the government this month cut its 2012 output target from the three main producing regions by as much as 7 percent from a year ago.

The government also set the nationwide output target at 3.65 billion tonnes, an increase of under 4 percent from a year ago. In 2011, output grew about 9 percent on the year.

Coal demand is also expected to be fragile amid a weak economic outlook for the rest of the year.

A Reuters poll forecasts this year to see the slowest full-year of economic growth since 1999 as demand for China’s factory goods falls due to the debt crisis in its biggest customer the European Union.

“The coal market will remain challenging,” said Ivan Lee, a coal analyst at Nomura Bank.

FACTORY-DRIVEN REBOUND

Chinese coal prices can only rebound if demand recovers considerably, which requires the manufacturing purchasing managers index (PMI) to rise above 50, economic growth to climb above 8 percent and power plants’ coal stocks to fall by half, Lee said.

The data, however, is not encouraging. The latest PMI showed China’s manufacturing sector contracted at its sharpest pace in nine months in August, with the index falling to 47.8 from 49.3 in July.

Even if China decided it needs more coal, which is unlikely, it will not seek it abroad as imports have become more expensive than domestic supplies, traders said.

Australian imports, based on the globalCOAL index, now cost around $3 per tonne more than Chinese prices, although some traders are selling blended material at lower rates.

“We are not out of the woods yet. With industrial users accounting for the bulk of power consumption, we really need the economy to pick up,” said Geng Zhicheng, a researcher at Energy Research Institute, a government think tank.

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