Chinese Coal Market: Policy Exhaustion, Peak Demand, Power Cuts

There appears to be a growing misalignment of Chinese government policies as it becomes apparent that efforts to cool commodity prices are not working, this is resulting in sporadic attempts from different parts of the government to calm the situation.
 
The NDRC are calling for increasing stockpiles to bolster security of supply, yet officials recently visited a port in Tangshan to investigate coal hoarding (which is a synonym of storing…).

Some provinces have eased import restrictions, yet Beijing is considering a price cap which may disincentivise imports.

 
This assortment of policies is looking increasingly impulsive.
 
Last winter there were power cuts across China but the impact was limited, however now the summer power demand peak is approaching with a roaring industrial sector.
 
Power rationing is already taking place across China as the supply crunch arrives early, with the warmest month still being ahead of us. This is at a time when recent wet weather should be supporting hydro output throughout June and easing the burden on coal. However for July the picture changes dramatically as year on year hydro output is expected to drop significantly, which will partially be supplemented with increased coal output.

This supply shortfall can continue to been seen in how China is now sourcing plenty of coal from the Atlantic. The recent rally in API2 may be more attributed to Asian demand rather than EU demand, however EU demand has crept higher.

A look at the Q1 balance sheet for Chinese coal puts the market in a notable deficit, consequently stocks have been drawn on heavily over the past months. We expect the Q2 balance sheet to be even tighter as domestic production growth eases whilst electricity demand growth continues.

The Chinese coal market is in a deficit, and imports are trying to help plug the gap between supply and demand. Stocks are low, and will need a large restocking over the coming months in order to avoid another series of power cuts during the winter. With Australian coal off the menu, Chinese demand for Atlantic coal is set to power on.

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