China Seen Targeting ‘Comfortable’ Coal Price by Managing Miners

  • Output deal indicates ‘desired’ price 460 yuan a ton: UOB-Kay
  • Newcastle prices gained as much as 40% this year on China cuts

China is targeting a price range for thermal coal after output cuts led to a sharp increase in imports and prices, according to analysts from Citigroup Inc. and UOB-Kay Hian Ltd.

An agreement this week between regulators and miners to coordinate production shows that China’s “comfortable range” for Bohai-Rim coal is 450 to 500 yuan a ton ($67 to $75), Citigroup analysts including Jack Shang said in a report. The plan will see miners cut or boost output to keep prices within the desired range, according to UOB-Kay Hian. The Bohai-Rim index, which tracks thermal coal prices across six northern ports in China, was at 515 yuan on Sept. 7, while spot Newcastle coal advanced above $70 on Tuesday for the first time since March 2015.

Newcastle thermal coal is heading for the first annual gain in six years as China seeks to cut overcapacity and curb pollution. While the timing of the output adjustment is unavailable, it may start in September or October after recent price gains, Citigroup said in the report dated Sept. 8. Bohai-Rim is 26 percent higher from a year ago, when it was 409 yuan, while Newcastle has climbed as much as 40 percent this year.

“This is aimed at further strengthening government control on coal prices and stabilising coal prices at a reasonable level,” UOB-Kay Hian analyst Yan Shi said in a report dated Sept. 9., adding that the plan indicates the government’s “desired” price is 460 yuan a ton. “At this coal price level, only efficient coal companies would profit and this would help to cut excess coal capacity as required by the supply-side reform policy.”

Chinese producers will boost supply by 200,000 tons per day if prices gain for two consecutive weeks and climb above 460 yuan a ton, according to a Shanghai Securities News report. The deal also has specific output additions should the price hit 480 and 500 yuan a ton, respectively, the report said. The agreement has similar levels at which to cut output if coal price declines for two consecutive weeks.

China’s Bohai-Rim index is 14 percent higher than a month ago, when prices were at 452 yuan a ton, according to Qinhuangdao Seaborne Coal Market’s website. Newcastle coal closed at $69.60 a ton on Thursday, according to data from Globalcoal.

The reduction in output is also helping to boost metallurgical spot prices, which have more than doubled this year, outpacing gains from the best performers in energy, metals and agriculture. China cut 150 million tons of coal capacity, meeting 60 percent of its annual target, at the end of August, Caixin reported, citing National Development and Reform Commission official Lu Junling.

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