For thermal coal, it’s going to be a glorious winter and a poor spring, Yuan Talks:
Several regions in China are in the grip of a power crunch partly caused by short coal supplies and surging coal prices. Industry insiders say that policymakers’ efforts in boosting coal production in the past few months have so far failed to ease coal supply and the tight situation is unlikely to be reversed in the short term.
In southern China’s Guangdong province, the local economic planner said in a notice on Monday that the ongoing power shortage was mainly due to surging coal prices which dampen power plants’ production.
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A staff of a coal-fired power plant in Guangdong told Yuan Talks that “coal prices are currently about 1,400 yuan per tonne. That means the cost for power production is 0.448 yuan per kWh and combined with other costs, we are actually operating at a loss.”
An employee at another power plant said that, as of September 16, coal inventories at major power plants in Guangdong stood below 2.4 million tonnes, nearly 60 per cent lower than that in the same period last year.
Guangdong is not a standalone case. China’s total coal inventories are currently close to historic lows. According to data from Cinda Securities, as of September 23, the total coal stockpiles at China’s eight coastal provinces stood at 17.74 million tonnes, falling 8.7 per cent from the previous week. The inventories are equivalent to only 9.3 days’ coal consumption, shortening by 0.9 day from a week earlier.
Coal prices have jumped amid the persistent shortage. The CECI Coastal Coal Price Index for 5,500 kcal/kg thermal coal released by the China Electricity Council stood at 584 yuan per tonne on March 5. On September 27, the index jumped to 1,086 yuan per tonne, representing a surge of 46.2 per cent. In the week of September 16 – 23 alone, the index surged 9.7 per cent from the prior week.
“Spot prices of 5,500 kcal/kg thermal coal at ports in North China are around 1,600 yuan per tonne, about 1.6 times the level seen in the same period last year,” a coal industry analyst said. “It’s the first time I have ever seen such a rally in more than ten years.”
One of the major driving force for the surge in coal prices is unusually strong demand for electricity. Official data showed that China’s electricity consumption in the first eight months of the year reached 5.47 trillion kWh, 13.8 per cent higher than a year ago. Utilization hours of coal-fired power units reached 2,988 hours, rising 9.53 per cent from a year earlier.
For comparison, in the same period in 2019 before the Covid-19 pandemic struck, power consumption rose 4.4 per cent to 4.74 trillion kWh and utilization hours of coal-fired power units were 2,831 hours, down 3.64 per cent from a year ago.
But coal supply has failed to keep up due to tightening regulation on coal production and stricter safety inspection. According to data from the China Coal Industry Association, the country’s coal consumption reached about 2.1 billion tonnes in the first half of the year, rising 10.7 per cent from a year ago, while its coal output rose by 6.4 per cent to 1.95 billion tonnes in the period.
To make it worse, China’s coal imports tumbled by 19.7 per cent year over year in the same period amid surging coal prices in the international market, the impacts of the Covid-19 and the bilateral tensions with Australia.
Industry insiders say that, despite policymakers’ efforts to increase coal production in the past couple of months, coal shortage this winter will remain severe.
A staff at a coal-fired power plant in Liaoning province said the National Development and Reform Commission (NDRC), China’s top economic planner, recently allocated more than 10 million tonnes of coal to China’s northeastern regions amid a severe shortage. “Our plant can get 200,000 tonnes, but that’s only enough for about 20 days’ use. Our inventories are only enough for two days and power loads are currently kept at about 50 per cent.”
The power plant is operating at a loss, losing about 7 cents for producing one kWh of electricity, he said.
Since July this year, the NDRC has taken a series of measures to increase coal supply, including injecting coal reserves and encourage coal capacity approval, but so far they yield very limited results.
A coal company in northern China’s Inner Mongolia said that more than 30 coal mines were approved in Inner Mongolia and Shaanxi province, with a combined capacity of about 83 million tonnes a year. Back then, the coal miners were expected to start production from September 15, but their operations haven’t been fully started so far.
“Inner Mongolia’s Ordos city in July reported about 150 million tonnes of coal capacity for approval, but so far only 40 million tonnes of capacity has been approve and even the approved capacity has started full operation yet,” he said. Average daily coal output in September is largely nchanged from that in August.
The tight coal supply is unlikely to be reversed in the short term as it takes time for the policies aimed at boosting coal production to kick in, according to a note from Citic Securities.
Coal prices are expected to rise further in the third quarter and the fourth quarter, it said.
We shall see. They can’t rise too much further. Demand destruction is already rampant. Unless we get a nasty winter. Then all bets are off.
For LNG, seasonality should play the key role, S&P:
North American natural gas prices will likely remain above our medium-term Henry Hub price range through at least early 2022, building on their strong recovery in 2021, and higher demand for exports over winter months of 2022.
At a time of flat domestic demand, growth in US gas production and domestic gas prices will follow global demand and pricing dynamics. Higher international prices for natural gas amid fast rising demand in China and temporary shortages in Europe in 2021 point to further growth in US exports, particularly spot seaborne liquefied natural gas (LNG). The rising US natural gas supply and rebalancing of international markets will hold back a further rise in domestic prices in 2022, however.
We maintain our medium-term price range of $2.00-$3.00/MMBtu for Henry Hub, the North American natural gas benchmark—a range that estimates the prices producers require for profitable reinvestment. We would increase the range to include the rising full cost of production, with reinvestment decisions incorporating such factors as inflation in operating costs, a shift to a higher-cost inventory that makes development more expensive, or additional regulatory costs. Our medium-term price range also accounts for large-scale US production of associated gas, an oil byproduct whose growth depends on oil prices and production, rather than the natural gas market. Prices above $60/barrel for West Texas Intermediate, the main US benchmark crude, will foster continued recovery in associated gas production that will anchor domestic gas prices.
Growth in US natural gas production is accelerating with the rising supply of associated natural gas, but US exports will help balance the market. The US Energy Information Administration (EIA) expects that US natural gas production will increase to an average 92.7 billion cubic feet/day (Bcf/d) during the second half of 2021, up from 91.7 Bcf/d in the first half, before rising to 95.4 Bcf/d in 2022 (see Exhibit 1). The increase reflects both natural gas and crude prices. US natural gas production had begun to recover in 2021 with the gradual return of associated gas in the Permian Basin, rising gas-to-oil output in the Midcontinent, and a strong rebound in Appalachia production, according to EIA.
For coking coal, the equation is more simple. The levels of demand destruction are already immense. As China’s Mongolian border steadily reopens it should fall away pretty fast. I also expect more action from Chinese officials to squash futures in Dalian which are out of control. That said, it is clearly attracting a mad speculative bid in sympathy with all energy right now (see uranium!).
For me, oil supply is fine as OPEC, US shale and Iran steadily resume.
So, I still see nothing structural in the crunch and expect that when the market loosening comes it will result in huge price crashes much like iron ore and lumber before it.
As the Chinese hard landing becomes more apparent through Q4, that should cap the surge and begin to deflate it.
If the northern winter is cold then that could hold it up longer.