China’s efforts to overhaul its coal industry to reduce overcapacity after years of expansion and curb pollution are reverberating through global markets from steel to freight.
Output has fallen more than 10 percent so far this year as the government of President Xi Jinping ordered miners to lower output to the equivalent of 276 days of production, down from 330 days. China has also cut about 150 million metric tons of capacity by the end of August — equivalent to almost the entire thermal coal exports last year from Colombia and South Africa. China is aiming to chop about 500 million tons by 2020.
Why does China matter?
China is the biggest producer and consumer. Its output of 3.75 billion tons in 2014 — more than the combined production of the U.S., India, Australia and Indonesia — helps feed the world’s largest steel industry and fuel about 70 percent of the power needs of the world’s largest energy consumer.
China’s main impact on the global market comes from its imports, which accounted for about 19 percent of global seaborne trade last year, according to Bloomberg calculations and Morgan Stanley data. Production cuts have spurred overseas purchases to the highest since 2014 and are up more than 12 percent over the first eight months of this year, partially reversing a two-year slump after peaking in 2013.
What’s happened to coal prices?
After falling for five years and dropping to the lowest since at least 2008 in April, Newcastle thermal coal prices, an Asian benchmark, are up more than 40 percent this year to about $72 a ton. Spot prices for metallurgical coal, used to make steel, more than doubled since July to over $200 a metric ton, this year’s best-performing commodity. Thermal coal in Indonesia, the world’s biggest exporter of the fuel for electricity generation, has posted the longest run of gains since 2013.
Who are the winners?
Miners are finally getting some relief from the price collapse that’s cut into profits and even forced some producers into bankruptcy.
Indonesia’s PT Adaro Energy has seen its share price more than double, and the rise in thermal prices will help miners such as Glencore Plc, the world’s largest shipper of the power fuel. BHP Billiton Ltd., the biggest exporter of seaborne metallurgical coal, would see almost $5 billion added to its underlying earnings before interest, tax, depreciation and amortization in the year ending June 30 because of the surge in the steel-making raw material, Liberum Capital Ltd. said earlier this month.
The parent companies of two of China’s biggest producers — Hong Kong-listed China Shenhua Energy Co. and China Coal Energy Co. — have been tapped to help run the asset management company tasked with consolidating parts of the country’s coal industry.
The decline in Chinese production may be a “game changer” for the dry bulk shipping market, according to Clarkson Platou. Rates for Capesize vessels, the main coal-carrying ships, may climb to $11,500 a day next year amid rising imports. Shipowners will still be under pressure: The cash break-even cost is about $14,000 a day, according to Clarksons.
Who are the losers?
Steel mills from Japan to South Korea will get stuck with higher prices for metallurgical coal for the rest of the year, as they buy most of their supplies through three-month contracts. The increase will be taken into consideration during negotiations for the fourth-quarter supply deals, which Wood Mackenzie Ltd. predicts could be agreed at a level about 50 percent above the third quarter, while CLSA Ltd. sees a deal more than 60 percent higher.
China’s power producers will see their coal costs rise, while aluminum smelters may also take a hit as electricity accounts for about 40 percent of the cost to produce the material used in cans, beer kegs and airplane parts.
Regulators and miners agreed this month to manage production by cutting or boosting output to keep benchmark China prices within a range of 450 to 500 yuan ($67 to $75) a ton. Metallurgical coal isn’t included in the deal, according to Citigroup Inc. Analysts at Macquarie Group, and even BHP, see prices for met coal easing back.