September 21, 2017 / 11:38 AM / in 9 months

Diverging fortunes: China coal futures sink while physical firms

BEIJING (Reuters) - China’s physical thermal coal prices strengthened on Thursday as traders worried about logjams at ports even as futures investors bailed out at their fastest pace in months after Beijing signaled it was ready to take more steps to boost supplies.

Piles of coal are placed at a yard in Shuangyashan, Heilongjiang province, China February 16, 2017. REUTERS/Sue-Lin Wong

It is relatively unusual for the physical and futures markets to go in opposite directions and the divergence reflects conflicting views in the world’s top coal consumer about the outlook for the fuel ahead of the winter heating season.

In recent years, coal prices have been roiled by Beijing’s tough measures to curb excess capacity and shutter polluting industries, whilst this year the government has rushed to ensure supplies of the fuel that also accounts for the majority of China’s power generation.

On Thursday, the most-active futures prices sank more than 3.5 percent to 635 yuan ($96.27) per ton, notching up their biggest one-day drop since April. The drop came after state planner, the National Development and Reform Commission (NDRC), told railway and shipping firms to make coal transport a priority to regions where stocks are low.

Industrial demand is also expected to fall as factories from aluminum smelters to steel mills curb capacity as part of the government’s stringent measures for improving North China’s notorious air during the winter.

“The NDRC’s pledge to secure supplies as well as Shandong’s plan to reduce coal consumption ... hurt market sentiment today,” Xu Bo, analyst with Haitong Futures said.

State media reported that Shandong, China’s industrial and agricultural heartland, would reduce coal demand by another 200,000 tonnes per year by switching households to natural gas.

Meanwhile, China’s Bohai Sea index for coal with a heating value of 5,500 kilocalories per kilogram, known as CCI5500, rose 3 yuan, or 0.5 percent, to 586 yuan per ton on Thursday, according to the website run by Qinghuangdao port, the country’s main coal hub.

The Bohai index is a domestic industry benchmark.

Physical prices have been boosted by logjams at Qinghuangdao, where domestically produced coal is loaded onto coastal bulk vessels for delivery around China. More than 70 dry bulk ships were waiting on Thursday in the anchorage zones to load coal, shipping data in Thomson Reuters Eikon showed.

That’s due to limited space on the railroad leading from the coal mining regions to the coast, traders and analysts said.

Still, traders say the physical price gains are not justified given forecasts for lower power generation rates and rising stocks.

“It’s not going to stay there very long. The fundamentals are not great,” said one trader.

Reporting by Josephine Mason and Meng Meng; Editing by Tom Hogue

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