Reuters reported that aggressive production cuts and a hot summer have helped shrink China's main coal stockpiles by about 14% in the last two months, shoring up prices that have fallen by a fifth over the same period and signaling the worst may be over for the sector.
China is the world's top producer and importer of coal, and stable domestic coal prices will help put a floor under benchmark regional prices, which have been lolling at two year lows of CNY 626 a tonne since end July 2012.
Chinese demand, however, will stay weak and that may affect the profits and development plans of mining giants such as BHP Billiton and Xstrata, which have already taken a hit as China's economic growth and appetite for resources decline.
Top coal miner Shenhua Energy said that stocks at power plants fell to 85 million tonnes in August 2012 from 97 million in June 2012, while inventories at seven major ports declined to 18.5 million tonnes from 24 million tonnes.
Mr David Fang director at the China Coal Transport and Distribution Association, an independent industry group, said that "I think the days of sharp and steady falls in prices are over. The market has stabilized but it might take a few months before prices recover. Even when they do, we won't be seeing big gains because the economy is weak."
Record high output in the first half of the year and a surge in imports created mountains of coal at China's ports and power plants just as demand waned as the manufacturing led economy grew at its slowest pace in three years.
China imported 133 million tonnes of coal from January to July 2012 period, a 52% YoY increase, while production from the three provinces that account for almost two thirds of the total output hit a six month high of 217 million tonnes in May 2012.
CCTD data shows that by June 2012, total coal stocks across China's main depots and mines were a record 380 million tonnes, almost a third higher than a year ago and equivalent to one month's consumption.
Combined with weak demand, the supply glut led China's thermal coal prices to fall for 13 consecutive weeks.
Prices steadied at the start of August 2012 after miners in top producing regions Inner Mongolia, Shanxi and Shaanxi cut output to 196.3 million tonnes in July 2012, a 9.5% decline from May 2012.
A hot summer also meant coal stocks at power stations fell by an average 5% a week during July and early August 2012, contributing to the overall decline.
Coal stocks are likely to fall further until the end of the year as the government this month cut its 2012 output target from the three main producing regions by as much as 7% from a year ago.
The government also set the nationwide output target at 3.65 billion tonnes, an increase of under 4% from a year ago. In 2011, output grew about 9% on the year.
Coal demand is also expected to be fragile amid a weak economic outlook for the rest of the year.
A Reuters poll forecasts this year to see the slowest full year of economic growth since 1999 as demand for China's factory goods falls due to the debt crisis in its biggest customer the European Union.
Mr Ivan Lee, a coal analyst at Nomura Bank, said that "The coal market will remain challenging."
Mr Lee said that Chinese coal prices can only rebound if demand recovers considerably, which requires the manufacturing purchasing managers index to rise above 50, economic growth to climb above 8% and power plants' coal stocks to fall by half.
The data, however, is not encouraging. The latest PMI showed China's manufacturing sector contracted at its sharpest pace in nine months in August 2012, with the index falling to 47.8 from 49.3 in July 2012.
Traders said that even if China decided it needs more coal, which is unlikely, it will not seek it abroad as imports have become more expensive than domestic supplies.
Australian imports, based on the globalCOAL index, now cost around USD 3 per tonne more than Chinese prices, although some traders are selling blended material at lower rates.
Mr Geng Zhicheng, a researcher at Energy Research Institute, a government think tank, said that "We are not out of the woods yet. With industrial users accounting for the bulk of power consumption, we really need the economy to pick up."
Source - Reuters
(www.coalguru.com)
Prices/Steam Coal/China
