Coal price rally to continue

Chinese thermal coal prices have rallied over 10% in the last month or so. Prices are so much higher than most were expecting, although I feel I can claim I was bullish based on the analysis in this post and even back in August in this post.

If anything, the Chinese market continues to look tight and inventory levels too low. This should ensure prices keep rising, with Q1 also likely to be tight at this stage. This should also provide support to seaborne market prices.

Looking just at the coastal portion of coal market, Chinese domestic shipments have been strong in September and October, rising 12.6%YoY over these two months.

But the YoY gains have been entirely driven by destocking at ports rather than an increase in coal railed or trucked from mines.  This has left port stocks at critically low levels.

Total thermal coal imports were flat YoY in October as well, meaning all of the additional supply to satisfy rising coastal demand has come from destocking.  Its unlikely that this continue much further after a further reduction in November.

It seems likely that Chinese imports will be much stronger in the coming months given renewed interest in seaborne markets in the last month.

But its still questionable whether imports alone will be enough to bring stocks to decent levels for the peak winter period.  To be sure, China's dependance on imports usually rises into year end as moving coal domestically becomes more difficult.

So while Chinese prices have already rallied a lot, it still seems to me that the risks are to the upside given where consumption is heading along with inventory.

Further gains in Chinese prices will perhaps give renewed strength in key seaborne market indices like API#2 and API#4, which have done very little for the last couple of months.  The early rally in these prices is perhaps only justified now by the tighter market we see today, but it still has the potential to rally further.