China wields political might to cool coal prices, but winter looms

BEIJING, Nov. 12 (Reuters) - In just 10 days of a spate of meetings and official announcements, Chinese regulators almost halved the rise in domestic prices for steam coal, the main energy source of the world's largest economy, last month.

Beijing's series of interventions underscored the scale - and some limitations - of its regulatory power, but the country still faces the daunting task of keeping fuel cheap and plentiful through the winter.

The price of steam coal - which accounts for around 60% of China's electricity needs - more than tripled in the twelve months to mid-October after years of efforts to contain overproduction met booming industrial demand after the pandemic.

When soaring prices forced electricity producers to cut production, triggered electricity rationing, and weakened economic growth, Beijing sought to stimulate production and take measures ranging from price targets to cracking down on hoarding and investigating data providers.

The top-traded thermal coal futures on the Zhengzhou Commodity Exchange tumbled in the 10 days after hitting a life high on October 19, falling 56% from that level on Friday.

Physical coal spot prices in Guangzhou's southern port have also fallen sharply and are now nearly 44% below their October high. However, prices for both are still up more than 60% so far this year.

International and Chinese steam coal prices fall from record highs

"No other country could have achieved a similar result, given the size and schedule," said Steve Hulton and Fabian Ronningen, analysts at consulting firm Rystad Energy.

"It really shows the power of the Chinese authorities over the domestic coal market and the economy in general."

The spate of intervention has spread to the global coal market, with prices in major coal exporters Australia and Indonesia falling in recent days, leaving market participants reluctant to further regulatory intervention.

The recent cold snap in China has boosted demand for heating oil

And with colder temperatures across China spurring demand for heat and the need for more coal, Beijing is likely to come under pressure to control the country's energy supplies and costs for generating power well into 2022, analysts and traders said.

'CONTINUOUS DECLINE'

To reverse the month-long rise in the price of coal, Beijing held dozens of meetings with producers, utilities, rail operators and industry associations that produced a barrage of market messages and warnings.

According to a summary circulated among traders, 71 power-related documents were issued by 32 national and local government agencies in October alone, deterring coal futures trading, with an open interest in coal and a collapse in volumes on the Zhengzhou Stock Exchange.

"'Never fight regulators' is the mantra," noted Kevin Xue, chief Asian economist at Commonwealth Bank.

China's coal futures open interest and trading volume

Miners have been urged to reverse course after years of efforts to contain overcapacity by closing inefficient, low-yielding or polluting coal resources.

Beijing's persuasion has so far worked, with daily coal production reaching a record high of 12.05 million tons on November 10, the country's state planner said.

China's coal production is well on the way to hitting a new all-time record in October if the latest production pace is maintained

Traders who attended a meeting convened by the National Development and Reform Commission (NDRC) on Nov. 3 said the top economic planner's message was now that coal prices shouldn't fall too far and too quickly.

"As more coal capacity will be released and production will continue to rise ... coal prices are expected to continue to fall steadily," the NDRC said on Sunday.

LOW STOCK

The recent surge in supply of fresh coal mines and a regulatory change that allows power producers to pass on higher prices has helped increase electricity production for households and reduce the number of electricity caps in place since September.

But analysts are closely monitoring China's coal reserves for signs of market shortages.

Total coal supplies in key ports across China - a metric that reflects both domestic production and imports - stood at 52.4 million tons in October, according to the China Coal Transportation and Distribution Association. This is an increase of 1.8% from September, but about 20% below the October average from 2017 to 2020.

Chinese coal stocks in ports

According to Caixin Data Technology Co.

Winter ahead can also weigh on supplies, especially in open pit mines, which can be affected by heavy snowfall, raising questions about the sustainability of the recent surge in production.

And with heating demand now set to rise with the start of winter, China's State Grid Corp warned on Sunday that there would be a "tight balance" between electricity supply and demand by spring. Continue reading

The analysts at Rystad Energy expect a further decline in prices in the short to medium term, but warned that "the steam coal market is currently still very tight, so that supply interruptions or extreme winter weather events could easily drive prices up again."

"We expect price volatility to be high," they added.

Beijing's commitment to steering the market is clearer, said Yu Aiqun, a researcher at the US think tank Global Energy Monitor.

"The government can intervene as deeply as it wants," she said.

Reporting by Shivani Singh and Muyu Xu in Beijing, additional reporting by Emily Chow and David Stanway in Shanghai and Aizhu Chen in Singapore and the newsroom in Beijing; Arrangement by Gavin Maguire and Richard Pullin

Our Standards: The Thomson Reuters Trust Principles.

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