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Chinese coal prices set to stay low on mainland for next 12 months

It is reported that mainland coal prices are expected to stay low for at least the next 12 months after a protracted slump, weighed down by weak demand, environmental constraints, domestic oversupply and rising imports.

According to some analysts, a meaningful recovery is some way off, while further downside is limited as leading domestic miners cut back on output to prevent prices from sinking to loss-making levels.

Analysts at ANZ last month slashed their forecast for this year’s average seaborne power-station coal by 4% to USD 74 a tonne, next year’s by 7% to USD 78 and that of 2016 by 11% to US$82, saying “coal markets are awash with coal at a time of soft demand”.

It said that “But falling new mine investment [in Australia and Indonesia] should mean tighter supply and better prices in 2016 and 2017.”

The two nations account for most of the mainland’s coal imports, which, although accounting for only 9% of consumption, has grown robustly in the past few years.

ANZ said that Australia has ramped up supply because some miners who committed to costly rail and port facilities built during the commodity boom in 2010 and 2011 are stuck with high payments, and were forced to keep raising output even with prices falling in order to spread the high fixed costs over high sales volume.

The bank said that further price downside is limited since the current benchmark Australian coal price of around USD 70 a tonne is not much higher than the USD 60 a tonne break-even production cost of the mainland’s largest and most efficient coal miner Shenhua Group.

Prices at the mainland’s largest coal port Qinhuangdao have fallen just over 40% since the downturn in coal prices began in late 2011, and have slid some 22% so far this year.

Jefferies Securities analysts said that they believe prices will not materially recover and have yet to bottom out, adding mainland coal demand has “more or less peaked”.

Increasingly stringent environmental protection regulations mean highly polluting coal-fired power’s competitiveness over subsidised clean energy is slowly being eroded.

The latest tightening of emission standards took effect on July 1, forcing operators to spend more to remove pollutants or shut non-complying plants.

Ratings agency Standard & Poor’s in a report said that”As governments globally seek to reduce their carbon dioxide emissions, it looks increasingly likely that ‘king coal’ will lose its crown.”

S&P projects the mainland’s coal demand growth to stay at low single-digit percentages before flattening by 2020.

According to data from the China National Coal Association, amid oversupply, the mainland’s coal output last year grew 1.4%, or by 50 million tonnes – the lowest in more than a decade.

In this year’s H1, output fell 1.8% YoY. Still, net imports grew 1.5%.

The industry’s H1 profit fell 44% from a year before to 51.3 CNY billion. Of the 36 large miners tracked by the association, 20 were in the red, nine are close to breaking even and over half have cut or delayed paying salaries.

Source –  scmp

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