China coal stocks plunge

The latest reading at key power plants was the lowest it has been for a long time @ 16 days of consumption and 65.9mt.  That is an astonishing 20mt lower than this time last year.

A strong lift in consumption appears to be the key factor driving lower stocks.  A heatwave is a big part of this, which isn't necessarily bullish given its not sustainable.  Lower growth in hydro generation is also playing supporting better growth rates in coal burn.

Anecdotally the run down in stocks hasn't created any additional interest from Chinese utilities, with there not a lot of demand tension to bid up prices from current low levels. I think that this will have to change though, even if the demand surge is a temporary weather blip.

While a lot of the focus on inventories tends to be on the current level of days of stock, what is much more important is the rate at which stocks are coming down relative to future consumption. That is what ultimately tips the balance of demand and is likely to push prices higher.

It would take a huge collapse in coal burn rates from current levels for stock levels to be tipped higher into September.  While an end to the hot weather could contribute to this, there is also some underlying economic momentum driving consumption higher, even if it is slower than previous years.

This means when September comes around, stocks are likely to be at similar or lower tonnages than at present.

Heading into winter they will need to lift supplies given the usual seasonal demand impulse.  Furthermore they will need additional tonnages to build inventory. The current level of stock equates to under 15 days of peak winter consumption seen last year, so any further growth on top of that will provide additional pressure.

Domestic supply usually picks up during restocking periods in September/October but current prices it is unlikely that Chinese domestic supply will be as flexible to provide additional tonnes.

To be sure, Chinese producers have already cost cuts to maintain production into a weak price environment.  Coastal supply, which is the most marginal in China given the transport costs, was up 17%YoY in June even though prices were 20% lower.

But can they go further with cost cuts and provide additional supply needed for restocking at current prices?  I don't think so.

It also seems likely that seaborne prices will have to move higher to induce additional import supply. While growth from Australia and Indonesia will likely add to Chinese imports, flows from further exports like Colombia and the US will not happen at current prices either.

All this suggests to me that prices for Q4 and Q1 should be quite a bit higher than today.