It is reported that with the steep slowing of the power steel and non ferrous metal industries in China, coal prices dropped sharply in November. Now the price for high rank power coal has dropped by about 50% from its peak and the trading volume is falling. The CNY 4 trillion rescue package will not immediately change the shrinking demand and prices will continue to drop.

As per report, domestic coal prices rose like a rocket and dropped like a stone this year. They rose almost day by day from the beginning of the year and reached a peak in September, when the price for refined coal with calorific value per kilogram higher than 5,500 kilocalories reached about CNY 1,100 per tonnes. Since then, coal prices have slipped steadily and slumped in recent weeks. Now the price for that same coal has dropped to about CNY 540 per tonnes.

According to the operator of a large power plant in Ordos, Inner Mongolia power consumption has dropped sharply since October. Now the plant is running only three of its eight generating units. With the decline in power consumption, coal consumption must also slide. Judging from current stock and signed contracts, the plant won’t need to restock coal in the next three months. This has dramatically altered the relationship between power plants and coal suppliers. This operator said that the plant had been negotiating with coal suppliers for their winter stock but a week later prices slumped. Now coal suppliers are begging power plants to buy more coal.

According to figures from Inner Mongolia, capacity of power generators lying idle is over 10 million KW. Many plants are running at less than 50%. In the January to October of this year, power consumption on the Inner Mongolia grid slumped by nearly 30% YoY and even 80% in some areas. And like the power industry, other major coal consumers such as the steel, cement and chemical fertilizer industries are also burning less coal due to slowing in their own markets.

Reaching a real bottom depends on improvement in the macro economy and downstream industries such as power and steel. But coal prices have risen greatly over the past five years and the profit level of the industry was excessive. This continuous price drop will help to return profit to more sustainable levels but only after a bottom has been reached. In the next few months main stream power coal prices may yet decline considerably.