Saturday 6 December 2008
Coal Price Plummet Set to Continue, Defying Stimulus Plan
With the steep slowing of the power, steel, and non-ferrous metal industries in China, coal prices dropped sharply in November. Now the price for high-rank power coal has dropped by about 50% from its peak, and the trading volume is falling. The 4 trillion yuan rescue package will not immediately change the shrinking demand, and prices will continue to drop.
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Coal Price Plummet Set to Continue, Defying Stimulus Plan
6 December 2008
With the steep slowing of the power, steel, and non-ferrous metal industries in China, coal prices dropped sharply in November. Now the price for high-rank power coal has dropped by about 50% from its peak, and the trading volume is falling. The 4 trillion yuan rescue package will not immediately change the shrinking demand, and prices will continue to drop.
Domestic coal prices rose like a rocket and dropped like a stone this year. They rose almost day by day from the beginning of the year and reached a peak in September, when the price for refined coal with calorific value per kilogram higher than 5,500 kilocalories reached about 1,100 yuan/ton. Since then, coal prices have slipped steadily and slumped in recent weeks. Now the price for that same coal has dropped to about 540 yuan/ton.
The coal price decline is directly due to fall in demand. According to the operator of a large power plant in Ordos, Inner Mongolia, power consumption has dropped sharply since October. Now the plant is running only three of its eight generating units. With the decline in power consumption, coal consumption must also slide. Judging from current stock and signed contracts, the plant won’t need to restock coal in the next three months. This has dramatically altered the relationship between power plants and coal suppliers. This operator said the plant had been negotiating with coal suppliers for their winter stock, but a week later prices slumped. Now coal suppliers are begging power plants to buy more coal.
According to figures from Inner Mongolia, capacity of power generators lying idle is over 10 million KW. Many plants are running at less than 50%. In the first ten months of this year, power consumption on the Inner Mongolia grid slumped by nearly 30% year on year, and even 80% in some areas.
And like the power industry, other major coal consumers such as the steel, cement, and chemical fertilizer industries are also burning less coal due to slowing in their own markets.
The sharp coal price decline has not made coal consumers any less uneasy. Shi Zhenping, vice-general manager of Mengda Power Company, said the current power consumption decline is the most drastic he’s seen during his 20+ year career in the power industry. What is happening in Inner Mongolia is a miniature of the whole country. As power consumption falls drastically and many generator units are laid idle, power plants are feeling more pain then they were several months ago when coal prices were higher. As an advanced power company close to a coal source, Mengda’s profit-making ability leads the industry. But it has been struggling with demand decline for several months and has recently suffered losses.
To maintain the basic supply and demand balance in the market, key coal producers have decided to cut production to keep prices stable. The measure has helped to maintain price stability in some areas, but the low trading volume means it can’t stop coal prices from dropping. After a sharp decline in the previous round, panic selling on the coal market has generally disappeared. Coal prices have been comparably stable the past few days, but nobody expects that the price has bottomed out.
Reaching a real bottom depends on improvement in the macro-economy and downstream industries such as power and steel. But coal prices have risen greatly over the past five years and the profit level of the industry was excessive. This continuous price drop will help to return profit to more sustainable levels, but only after a bottom has been reached. In the next few months, main stream power coal prices may yet decline considerably.
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