High frequency China - momentum maintained in early Nov

Both steel production and coal consumption data were strong in early November. This suggests macro momentum remains good, although YoY growth might be a little slower thanks to the stronger comparison period of 4Q12.

This strength should keep iron ore prices strong and Chinese thermal coal prices should continue to rise.

YoY growth in Chinese steel production has slowed, but as the chart left shows, the comparison period for 2012 is now a lot stronger than September/October.  To be sure, the level is still much stronger than even the most optimistic forecasts would have thought at mid-year.

In previous years there has been an issue that steel production is under reported as mills look to avoid sanctions from policymakers trying to reduce oversupply in the steel industry.  One sign of under reporting is a spike in the the percentage of steel produced by CISA mills.

These data very accurately captures production from large mills, but estimates steel output of small mills.  This is the production that tends to be under reported at year end, but there of no signs of this so far.

Strong steel production has helped keep iron ore prices much stronger than expected this year. And there is a good chance that this will also support stronger than expected prices next year, given that even though seaborne iron ore supply has been strong, it hasn't made any in-roads into displacing high-cost Chinese supply.

On the power side, Chinese coal burn rose ~10%YoY in the first 10 days of November.  Given the recent trajectory of hydro generation, this is consistent with power generation growing at ~7.5%.

This is consistent with forecasts made previously, with prices at Qinhuangdao continuing to rise fairly quickly at ~RMB565/t at the moment.

For me the risks still seem skewed to the upside. Coal stocks at power plants were stable in level terms, but have slipped in terms of days of consumption.  If growth is maintained at the current rate, the current level of stock will cover just under 18 days of peak December consumption.

On that basis, there isn't a lot of room to draw down inventory on an absolute basis from current levels.  Furthermore, stock further down the chain is currently low, with port stocks at QHD, Jintang and other key ports much much lower than this time last year.

So I would stick with coal continuing to rise for now, particularly given the higher risk of supply disruptions on a seasonal basis.  I wouldn't, however, see this as the return to the boom days for coal, with prices unlikely to get back to where they were a couple of years ago.

Indeed, most of the price opportunity has probably already disappeared in the main indices like API#2 and API#4, which rallied sharply months ago.  But some of the off-spec coal markers should get more supported, as should coal equities.