Coal Prices Dropped – Not Fundamentally but Rather on China’s Regulatory Enforcement Action

On Wednesday, thermal coal futures in China fell to their lowest level in more than a month.

The most liquid thermal coal contract on the Zhengzhou Commodity Exchange fell 10% on Wednesday morning, reaching its authorized daily decline limit. To date, prices have dropped about 40% from record highs reached last week due to coal shortages. This suggests that mindless linking of coal price forecasts to similar ones in other members of the energy commodities group – might be an inexcusable mistake. According to Reuters, China’s National Development and Reform Commission (NDRC) on coal prices’ sixth consecutive day of decline, said it would conduct "clean up and rectification" work on coal storage sites.

The planner, NDRC, also said it had met with key coal producers to discuss the possibility of the State intervention to stabilize prices. The state planning entity said it will work restlessly to "clean up and rehabilitate" coal storage facilities in some coal-mining regions and ban those coal storages that work without government approval. Again, we must outline, a similar effort would be nearly useless if they dealt with the elevated prices of gas or crude oil, so, once again, the coal market is different! Basically, the single reason behind the recent abrupt sell-off in thermal coal was the very NDRC statement saying it was seriously considering a possibility of such an intervention. China, so far the world's largest coal producer and consumer, is dipping into an energy crisis as coal electricity accounts for about 60% of the country's electricity production.

NDRC also said in a statement that they identified many unlicensed coal storage facilities around mines in the main mining areas of Shanxi, Shaanxi and Inner Mongolia, "allowing illegal traders to store coal" and "seriously undermine market stability." In addition, the regulator threatened to intensify investigations and strengthen oversight in the three territories, outlining it was necessary to create an enforcement system to control the corresponding requirements.

They said they also need to tackle illegal commercial activities such as the accumulation and overpricing of coal through the use of coal storage facilities. In an effort to reduce supply shortages, China is pushing coal miners to ramp up imports to help power plants recover dormant inventories ahead of the approaching winter heating season. However, local experts say the deficit is likely to persist for at least a few more months. Morgan Stanley predicted in its research note on Tuesday, that average coal prices are expected to drop to 700 yuan next year from average 912 yuan in 2021, while the investment bank remains profoundly bullish on the rest of the energy commodities.

Interestingly, China’s domestic petrochemicals such as methanol and ethylene glycol also briefly fell 6.9% and 4.3%, respectively, while prices for urea, which uses coal as a feedstock, dropped 3.8%. Coking coal and coke futures also fell 9%, while LPG (liquefied petroleum gas) futures fell 4.8%.