Coal news and updates

China’s coal demand seems to be gathering steam. But investors shouldn’t let the soot cloud their judgment.

 

China’s overall goods imports rose in August from a year earlier, the first such increase since late 2014. Riding the wave: Coal import volumes rose 52% over past year, customs data showed Thursday. What looks like a shortfall of coal supply has, in part, sent thermal coal prices up 40% since the beginning of the year. In recent months, China has mothballed coal production. But rarely have China’s restrictive measures, whether imposed on capital flows or elsewhere, been this effective.

 

A few temporary factors have run down coal inventories at ports, including higher electricity generation and coal consumption for thermal power in July. That led to panic buying onshore.

On the supply side, factory shutdowns to clear the skies ahead of the G-20 meetings and heavy flooding earlier in the summer kept buyers from maintaining coal stock. Broader policy measures may have also led to more volatile supply. Coal mines have had operating days reduced, so when they do produce, they have to churn out as much as they can. Actual capacity closures targeted a relatively modest 500 million tons a year out of a market with over five billion tons of capacity.

 

Another artificial support: trading of steam-coal futures, which have jumped almost fourfold this month. Unlike other major coal-futures contracts that are mostly settled in cash, the Zhengzhou steam-coal contract is settled with the physical delivery of goods, a source of apparent demand but unlikely that of end-use demand.

Rising imports—and the skyrocketing price of coal—shouldn’t be confused with a coal drought of any sort. The seasonal slowdown at major power plants is kicking in. A sampling of six power plants by Jefferies’ Laban Yu showed the summer demand for coal dropped off 22% last week.

 

Notably, alternative sources of power—including wind, hydro and nuclear—are growing much faster than coal, rising between 15% and 25% in July. Presumably that means there will be a shift away from coal and further drop-off in demand, especially now that China has committed to the Paris Agreement and increasing its low-carbon sources of energy.

SOurce:WSJ