China’s output cuts fuel demand for coal, trims inventories

Though China’s embattled coal industry is enjoying a windfall of sorts on the back of rising demand and shrinking inventories, leading coal firms are still expected to post losses for the first six months of the year, analysts said.

According to a research report published by Bank of China (BOC) International last week, coal prices will continue to climb in China, the world’s largest producer and consumer of coal, this month. The report said coal prices have been bolstered by supply cuts, shrinking overcapacity and increased demand for thermal coal in summer months.

Evidence that prices are picking up is already visible on the ground with China Shenhua Energy, the world’s largest state-owned coal supplier, increasing its contract prices for August by 18 yuan (HK$21) per tonne to 435 yuan (HK$508) per tonne, according to China Coal Resource Net. According to analysts, the company is expected to make further increases subsequently as its contract price is 20 yuan lower than the spot price, or current market price, which allows room for further growth.

“We may see contract prices surging in the low seasons of September and October and catching up with the spot prices,” BOC International analysts Maggie Sheng and Lawrence Lau said in the report. “Such moves will benefit Shenhua and the whole coal sector in the long run,” they said.

Spot prices of other categories have also seen an increase. Prices of Shanxi high grade thermal coal at the Qinhuangdao port rose by 50 yuan per tonne in July, while in Guangzhou, thermal coal jumped by 55 yuan per tonne to 500 yuan per tonne during July.