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One of the more interesting trends in the most recent round of detailed industrial output data is in power generation. While total generation jumped, there has been a widening divergence between thermal power and hydro.
Thermal power rose at 19%YoY in August, which is a huge turnaround from the near zero growth earlier in the year. Hydro is now falling 10%YoY after huge gains last year.
This hasn't translated into higher coal prices, with major producers still trying to undercut competitors with very aggressive pricing on certain products.
This looks unsustainable to me, with restocking demand likely to push prices higher through October. Inventories have already started to rise, with coal burn falling sequentially as the weather has cooled. But consider that implied consumption is still ~14% higher than this time last year and I struggle to see how supply can lift to meet peak winter demand and further stocking requirements if prices remain so low.
To be sure, prices were ~$10/t higher this time last year even though stocks were much much higher. While there has perhaps been some capacity to supply more coal in China at a lower cost than last year, I don't think there is enough to satisfy the ~10%YoY growth in coal burn that is a real possibility for Q4 this year.
