China steel keeps holding on as coal burn flatlines

The latest CISA data for mid-July shows production rates remain steady, with so far no ill effects from the weakness in property markets.  Coal burn, however, appears to be flatlining rather than ramping up into summer, which is worsening the near term situation for Pacific coal markets.

Production from CISA mills is now growing strongly thanks to the weak comps of last year, rising ~6%YoY in the first 20 days of July. Inventories at mills are a little high, but are quite low at steel traders, so the risk of a major fallout from summer destocking is limited.

It continues to be a surprise that production rates have been steady despite the weakness seen in other headline activity statistics.

Coal-burn is a very different story, with the first 10 days of the month looking very poor.  And this doesn't seem to be driven by very strong hydro generation, which was only moderately stronger YoY in June.

Its interesting that while the overstock is not as bad as in 2012, prices are currently lower than in the period in China.  This speaks to the continued erosion in the requirement for high cost coal given rail capacity additions over the past 2 years.

The weakness in China has undermined some seaborne marker prices for coal, although there have been some pockets of strength.

While Newcastle prices are languishing at the $68-69/t mark, delivered Europe prices have seen a nice bump over the last week or so.

The recent shift is mostly about short covering following the tragedy in Ukraine, with nat gas also rising in the region.  While this may fade, prices maybe a bit stickier as traders think more carefully about the prospect of winter restocking in Q4.