China thermal coal market continues to tighten

Chinese domestic coal prices have continued to rise over the past week or so, with QHD prices hitting RMB545/t.  With consumption looking decent and stocks not particularly high, it seems likely that prices will rise further and import demand will increase.

Data for September coastal shipments have now been released and can be used to get a good read on apparent demand in import-competing provinces.  Total shipments were exceptionally strong as shown on the chart on the left, hitting an annualised record.

A big part of this strength, however, was due to destocking at ports, with coal inventory at the 7 major Northern ports down 3.2mt from end August levels.  To put this into context, if this port destocking didn't happen, shipments would be only be 1% above 2011 levels.

The picture also looks interesting when adding imports to this equation.   September imports were up substantially YoY, although last year they were particularly weak.  As the chart on the left shows, domestic shipments plus imports is only on part with what we saw in 2011.

So total supply is actually not outrageously strong and is in part being supported by destocking.

Destocking at ports continued through October, although this appears to have merely been shifted into consumer stocks, which have risen over the month.

But October consumption levels are always pretty slow from a seasonal standpoint, with the chart on the left showing the normal seasonal ramp heading into November and December.

Furthermore, it appears that coal burn continues to grow at ~10% as we head into the month.  Stocks at power plants appear to be fairly stable so far in terms of days of consumption, but this will be too low relative to December consumption levels

Another notable change in the Chinese coal equation has been the big increase in domestic freight rates, which has added ~RMB20/t to the delivered cost of coal from the northern ports.

This is probably mostly due to the change in demand/supply dynamics in the domestic coal market rather than the more general spike in freight seen recently.  Chinese domestic coal is shipped on small ships and is a huge market, which is unlikely to be hugely affected by spikes in cape rates for iron ore.  That said, increased demand for Indonesian Nickel Ore ahead of potential bans next year may have influenced these rates somewhat.

Anecdotally there has been a meaningful increase in interest from Chinese buyers for import tonnes, although this has seen prices for off spec coal move very much at this stage.  But I think this is likely to change over November and December.

To be sure, consumption and stock trends are so far tracking in line with the assumptions I used in this post.  If anything apparent demand and destocking in Q3 was larger than I originally thought.

For me this skews price risk firmly to the upside.  While its unlikely we will get back to the glory days of pricing seen a couple of years ago, I still think we can get back to levels seen not that long ago, which are much higher than now.