Weaker coal burn suggest further China slowdown

Chinese coal burn growth slowed again in early December, growing at ~5%YoY.  Coal burn growth has now been slow for a good 30 days, suggesting the weakness is not just a blip.

This is an important signal for overall industrial activity in China, as it suggests there has been significant slowdown in the pace of growth.  It appears to be much more pronounced than the marginal weakness as suggest by the flash PMI data.  To me its very surprising that this is an indicator that no one really reports.

Steel production was also sequentially lower in December, although is still quite strong YoY.  The quality of the data does fall at this time of the year, as some mills under-report production to avoid government attention.  There are some signs that this maybe a bit of a factor in these data, although it is no where near as bad as previous years

This is important for metals and the A$.  While slower growth is not a disaster, those who trade on macro momentum will not take kindly to weaker industrial activity.

Is it so bad for bulk commodities? For iron ore, the current run rate of production should continue to support prices as inventories still look low.  In fact, port stocks actually fell a little over the last week, perhaps a sign of production under reporting as well. So there is no immediate concern that iron ore prices are going to fall out of bed.

For thermal coal, slower coal burn is not good news, but its not immediately negative for prices as it still looks like immediately available inventories are not high in critical parts of the supply chain.

The total level of power plant stocks has been stable in absolute terms at ~82.5mt and has ticked down to 20 days of use.  There are large regional differences in terms of stock build, which is not unusual for this time of year.  Central China does tend to build large winter stocks given the weather makes transportation tough and this year this has been at the expense of Eastern China, where stocks are low at 12 days of use.

If we just look at coastal china, which is key for import demand, it appears that immediately available stock remains low.  Port stocks have stabilised in the last few weeks, but still remain ~5mt lower than the end of September. Power plant stocks in Eastern and Southern China remain virtually unchanged, despite consumption moving higher.

The chart on the left compares this level of stock relative estimated consumption in Q4 in terms of days of use.  Even though I've lowered consumption estimates, it still looks low in terms of days of use and supportive of prices.

But if coal burn is now slowing towards ~5%YoY, what does that mean for Q1?  Using some rough estimates of import availability, it looks like stocks will rise in terms of days of use to levels not too far away from those seen late 2011.

The chart may suggest this means further upside for prices.  But I am not sure, as there has been a change in the ability of the supply chain to provide more coal at lower prices thanks to increased rail and port capacity.

So for now, thermal coal prices will probably go up.  But it looks increasingly likely that there will be a significantly turning point in Q1, which will affect Chinese domestic and seaborne prices.