China is using political force to cool coal prices, but winter is approaching Reuters

By Muyu Xu and Shivani Singh

BEIJING (Reuters) – Just 10 days after a meeting of official meetings and notes, Chinese regulators cut domestic coal prices by almost half last month, the world’s second-largest energy source.

Beijing’s plethora of interventions have underscored the extent of its regulatory power – and some limitations – but the country is still struggling to keep fuel cheap and plentiful in the winter.

The price of thermal coal – which accounts for about 60% of China’s electricity needs – more than tripled in the 12 months to mid-October, several years to reduce overproduction after strong industrial demand after the pandemic.

As the rise in prices forced electricity producers to reduce production, turn on power rationing and reduce economic growth, Beijing was forced to boost production and start from price targets to measures against data providers and crackdown on data providers.

The future of the most traded thermal coal on the Zhengzhou Commodity Exchange fell in 10 days after reaching a lifetime high on October 19, down 56% from that mark on Friday.

Physical coal prices in the southern port of Guangzhou also fell sharply and are now down nearly 44% from the October high. Prices for both, however, have risen by more than 60% this year.

(International and Chinese thermal coal prices for charts falling from record highs – https://fingfx.thomsonreuters.com/gfx/ce/lbvgnbboapq/International%20and%20China%20coal%20prices-Nov%209%202021.JPG)

“Another country could not have achieved similar results in terms of scale and timeline,” said Steve Hulton and Fabian Ronningen, analysts at Rystad Energy Consulting.

“It really shows the power of the Chinese authorities over the domestic coal market and the economy in general.”

The set of interventions has spilled over into the global coal market, Australia and Indonesia’s main coal exporting prices have fallen in recent days, leaving market participants wary of further regulatory confusion.

(To get a graph of the latest cold equipment made in China, it has increased the demand for heating fuel – https://fingfx.thomsonreuters.com/gfx/ce/akpezmmyxvr/BeijingTempsNov2021.png)

And as China’s cold temperatures increase the demand for heating and the need for more coal, it is likely that Beijing will put pressure on the country to manage its country’s energy generation fuel supply and costs by 2022, analysts and traders said.

“THE RIGHT REQUIREMENT”

To reverse the monthly rise in the price of coal, Beijing held dozens of meetings with producers, public services, railway operators and industry associations, and created numerous market missives and warnings.

About 71 power-related documents were issued in October by only 32 national governments and local organizations, according to a summary released among traders, cooling future coal trading activity, opening coal interest and falling volumes in exchange for Zhengzhou.

“‘ Never fight regulators ’is the mantra,” said Kevin Xue, a senior Asian economist at the Commonwealth Bank.

(Open interest in the future of Chinese coal and graph of trade volume – https://fingfx.thomsonreuters.com/gfx/ce/lgvdwnnldpo/China’s%203%20coal%20futures.JPG)

The miners were asked to change course after years of efforts to reduce their capacity by reducing efficient coal deposits, low yields or damaging coal deposits.

So far, Beijing’s boxing has been in operation, with coal production reaching a record 12.05 million tonnes on November 10, the country’s state planner said.

(For a graph of Chinese coal production, a new record is set for October if the final exit rate is maintained – https://fingfx.thomsonreuters.com/gfx/ce/znpnezqznvl/ChinaDailyCoalOutput.png)

Traders who attended a meeting of the National Development and Reform Commission (NDRC) on Nov. 3 said the message from the chief economic planner now that coal prices should not fall too far and too fast.

“With more coal capacity being released and production continuing to grow … coal prices are expected to continue to fall steadily,” the NDRC said on Sunday.

LOW STOCK

The recent rise in the supply of fresh coal mine and the regulatory change that allows electricity producers to pay higher prices https://www.reuters.com/business/energy/what-does-chinas-power-policy-shift-mean-metal-makers- other-energy-hogs-2021-10-13 has helped increase household electricity production and reduce the number of power reductions in effect since September.

But analysts are looking closely at China’s coal depots for signs of market tightness.

Coal inventories at key Chinese ports, a measure that reflects domestic production and imports, totaled 52.4 million tonnes in October, according to the China Coal Transportation and Distribution Association. This is up 1.8% from September, but about 20% of the October 2017-2020 average for October.

(For a chart of Chinese coal stocks in ports – https://fingfx.thomsonreuters.com/gfx/ce/lgvdwnnxzpo/ChinaCoalStocksAtPortsNov2021.png)

At the end of October, inventories of major plants from 2017 to 2020 were roughly below 38% of the month’s average, according to Caixin Data Technology Co.

The coming winter may also be stressful for supply, especially in open pit mines that may be affected by heavy snow – which has recently raised questions about the sustainability of rising production.

And as heating demand rises as winter enters, China’s State Grid Corp warned on Sunday that there would be a “tight balance” between electricity demand and supply until spring.

Rystad Energy analysts expect prices to continue to fall in the short to medium term, but warned that “the thermal coal market is still very tight, with supply disruptions or winter weather events could easily raise prices again.”

“We expect price volatility to be high,” they added.

What is clearer is Beijing’s commitment to lead the market, said Yu Aiqun, a researcher at the US-based Global Energy Monitor think tank.

“The government can put its hand on the market as deeply as it wants,” he said.