Thermal coal prices have been a bit stronger lately, although its not immediately apparent why. Problems in Colombia, the withdrawal of US tonnes at low prices and some winter stocking demand in Europe has created a little price tension. That said, Asian markets have been quiet, with holidays in China this week ensuring it will remain so in the very immediate future.
I still think China can provide further demand tension heading into winter months on restocking demand. Inventory is still too low compared to peak winter demand and in the last few years, while China does become more reliant on the seaborne market for supply heading into year end. I expect this to be the case again this year given the pressure on supply from very low domestic Chinese prices.
This should push the main indices higher and also lift prices for those lower CV products which have remained more subdued in the last few months.
Coal inventory at Chinese power plants have lifted quite a bit through September 20, rising ~6mt from the end of August to 19 days of consumption. Higher frequency data suggests things are broadly unchanged into the end of September.
This restock has taken place without any positive impact on prices. But despite the lift in inventory in terms of days of consumption, stock levels are still too low compared to peak winter consumption.
It also seems likely that part of this is satisfied by producer destocking rather than mine supply growth. While we are yet to get data for September, producer stocks have started to fall YoY in August, with the price crush driven by big producers likely to be supported by destocking.
Coastal shipments have risen in the year to date, with improved capacity at Huanghua accounting for a big proportion of the growth. We have also seen increased shipments from QHD and Tangshang ports over and above the increase in railings from the Daqin, which services both ports.
It is curious that total production levels are falling along with prices, but the highest cost part of the supply chain is growing. To me, this suggests to me that producer destocking is playing an important role.
Import growth was a bit softer in August, largely due to a big pull back in Anthracite from Vietnam, which gets used in power generation in Southern China.
Chinese appetite for imports is likely to be quite a bit higher in the coming months, although supply is also generally stronger into year end as well.
But it does seem likely China will need much more imports into year end than it did last year, particularly if recent domestic supply growth strength is related to producer destocking.
As the chart left shows, the total level of supply required in December last year was quite a bit higher than today. With underlying economic momentum pretty good, consumer inventory much lower and hydro generation falling, total required supply could be ~10% higher than this.
For me, this will be the key factor driving thermal coal prices up into year end, over and above the recent rally.
