While annual long term thermal coal contract negotiations were held at a recent conference in the western Chinese city of Xi’an – the broker said conclusive terms are unlikely to be reached until later this year.
“We think the conference marks the climax of government and producer efforts to push up coal prices from a trough in late August [475 yuan/t],” MWM said.
Measures have included the re-introduction of coal importing tariffs in October (thermal coal 6%) and “administrative orders” to state-owned coal producers and domestic power producers to reduce thermal coal imports.
National and provincial governments have also been reducing taxes and fees to help Chinese domestic coal producers reduce their costs.
MWM furthered that there seemed to be a policy initiative to “cut all production in excess of official mine nameplate capacity, estimated to total 4000 million tonnes per annum”.
“That this number has been rarely mentioned by official sources raises some uncertainty though,” the broker said.
“Speculation surfaced in late October and we saw a similar 300-400mtpa estimate from domestic media sources recently.
“While various provinces have been ramping up safety checks in recent weeks (which could be one way of restraining the above-capacity production), it is not clear how serious the government is about achieving such a large cut and to which stage the policy initiative has progressed.”
While the China National Coal Association recently restated 550 yuan/t for 5500 kilocalories per kilogram thermal coal (Qinhuangdao port delivered) as a policy goal price, leading producer China Shenhua Energy announced a December price of 539 yuan/t.
MWM said there was limited upside from a price of 550 yuan, seen as a profitable price for most Chinese coal producers, as smaller private miners become incentivised to restart operations from that level.
High coal stockpiles in the country and questions over government-imposed production discipline were also considered factors which could suppress Chinese thermal coal prices.
“Overall, government support and potential demand upside are positive factors, but the elevated inventories and untested production discipline could drag prices down.
“It seems for now when prices are below 550 yuan/t, government policy is the dominant factor to consider, but once prices reach this level, underlying market fundamentals are likely to reassert themselves.”
However, any recovery in the Chinese property market was seen as supportive of thermal coal prices given the use of this commodity in making cement.
“The recent interest rate cut and the government’s earlier tinkering with property policy are both positive factors for the housing market,” MWM said.