Thermal coal is not having a good month. With eurozone concerns and slowing growth in China already dragging on commodities prices globally, coal inventories in China – the world’s biggest consumer – are near record highs. Last week, thermal coal prices hit a two-year low in Newcastle, the Australian port.
A few days ago, a US utility company took the very unusual step of declaring force majeur on coal contracts because its coal piles were full – a sign of slack demand.
Add to all this gloomy news one more item: more analysts are joining the camp that believes China might not be a long-term structural importer of thermal coal. This could mark a very important shift.
Right now China is the world’s biggest net importer of thermal coal but that could change if China succeeds in tapping its own coal resources. By all accounts these domestic coal resources are plentiful. The problem is that they are far away: China’s power demand is centered on China’s east coast and southern China.
Many of the coal mines in central China have already been depleted after years of exploitation, so domestic coal sources are shifting farther and farther west – sometimes thousands of kilometeres away from the coastal Chinese cities where the coal will ultimately be burned to create electricity.
Transporting coal a long way is expensive and requires a lot of infrastructure, like railroads and logistics centres. But some commodities analysts have recently shifted to the view that in the long term China will succeed in building this infrastructure and resolve the transportation bottlenecks that have been a significant barrier for domestic coal trade in recent years. More analysts are starting to focus on China’s domestic production of coal as a key indicator for future global demand.
On Friday more analysts joined the group, with Bernstein Research publishing a note on China’s coal reserves. Simply put, “We believe China has plenty of coal,” it states. The analysts also explained why China’s domestic coal resources are so important:
“The stakes couldn’t be higher: from the outside looking in, the US has just joined Australia, Colombia, Indonesia, Mozambique, Mongolia and South Africa on the list of coal exporters that believe Chinese coal consumption and import growth are a one-way trade. If that assumption is wrong, where does all that coal go?”
Although Bernstein stops short of making a call on whether or not China will continue to be an importer of coal in the long term, they note that China’s cost of coal production appears to be getting cheaper and cheaper. Not a good sign for global seaborne coal markets.
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