China's recent attempt to control thermal coal prices in the country in the face of stronger-than-expected demand in January shows that suppliers may continue to experience a decline in opportunities in that market.
That’s the assessment of consultancy Wood Mackenzie, which said its long-term projections for weaker demand in the Chinese coal market – and the associated lower prices and tighter regulatory environment – will remain unchanged, painting a challenging picture for Canadian and American firms that may be looking to China for opportunities.
In February, Wood Mackenzie reported that China was seeing strong demand for thermal coal as a colder-than-normal winter caused power usage to surge. The report said that prices apparently hit 780 renminbi ($159) per tonne for the coal at the country’s Qinhuangdao port.
But Beijing’s National Development and Reform Commission quickly implemented a price cap of 750 renminbi ($153) on the coal, demonstrating that China’s coal market is becoming increasingly policy-driven and, therefore, more puzzling for “market participants and investors alike,” one analyst said.
“The constrained supply of coal due to a combination of policy and poor weather led to a reported suspension of the seaborne [coal] import ban this winter,” said Zhai Yu, a Beijing-based senior consultant for northeast Asia with Wood Mackenzie. “Sometimes, when the market supply is really tight, the government releases the limit on seaborne imports, but our view is that, once the price drops to a certain level and the supply is no longer tight, we think the government will reinstate the limits.”
Yu added that although Wood Mackenzie originally expected the cap to be difficult to implement – leading to a possible price jump after the lull during the Chinese New Year holidays in mid-February – that situation never materialized as China’s local coal supplies didn’t show any signs of constraint as of the beginning of March.
“There’s a number of factors there,” Yu said. “First, China has cut the holidays at domestic coal mines, asking the workers to keep mining to increase the supply. Secondly, China has asked the ports to get more coal at the docks [from overseas], and seaborne imports have increased after stopping the overseas ban, so the import level for the first month of this year is very high. So while the coal supply in February will be smaller than January, it will see an increase year over year.”
Perhaps the key take-away for North American producers and associates looking to China as a market for thermal coal, Yu added, is that the challenging long-term outlook hasn’t changed as China continues to show its willingness to intervene – in this case, with the price cap at Qinhuangdao – to reach Beijing’s overall objectives.
“In the long term, the market outlook, because China is trying to cut seaborne imports, we are forecasting that seaborne import will decline year after year,” Yu said. “So for North American thermal coal, we think that’ll be a problem. If you look at our forecast, that price will continue to slide down until 2021 to 2023. So the opportunity for Canadian or American thermal coal in China, we think, is limited.”
Reports do indicate that a smaller global supply may push prices back up in about five or six years, but even then the prices will rise gently and not with a major spike.
Fraser Surrey Docks applied in 2012 for a permit to create and operate a facility to transfer thermal coal from Wyoming to the Asian market. The measure was approved by the Vancouver Fraser Port Authority in 2014 but challenged by environmentalist groups. The Federal Court in Ottawa rejected the challenge on January 15, and officials with Fraser Surrey Docks have said in past reports that the project remains in play, although no construction date has been announced.
