Comment Detail

Self explanatory chart attached.
After 3 weeks of decline due to China's NDRC's import ban, prices ticked up gently this week.
Will this uplift be sustained?
Or is it just a temporary respite?
I don't know.
Market conditions based on my DD on the ground is that demand from end users is still stifled, as everyone is expecting traders and middlemen to dump more inventory in view of NDRC's uncertain policy. Reportedly, NDRC doesn't want the total coal imports in 2018 to exceed that of 2017, and we're kinda at the 2017 levels now.
So market participants are expecting the import ban to last for the rest of 2018 (1 more month), and following which, it's anyone's guess what happens in 2019.

TTI's investing hypothesis:
China has to keep domestic coal prices elevated to prevent many coal miners from going BK.
Yet, the power producers are all losing money at these levels, so they have to find a balance.
There's no incentive to accept coal imports now, as power producers are well supplied going into winter, and imported coal costs more than domestic coal.
They'd rather support their own local enterprises, yet these local enterprises have a poor safety and operational record.
After a year of enforced closures and forced mergers, they have managed to close down many smaller miners, to form larger conglomerates.
NDRC has also forced these larger entities to sign long term contracts to supply coal to the power producers, hoping that it'd give the end users more stability in their supply.
Due to the continued crack down on smaller mines, and the poor transportation infrastructure, NDRC will eventually have to allow imports again.
And when that happens, it'd be a boost to the overall market sentiment again.
These things happen periodically, as seen in the chart, which is why china's coal prices fluctuate up and down in this fashion.
It'd be at least a month, maybe longer, before we see a reversal in this current coal import ban.
The last time NDRC instituted a complete ban on coal burning for heat during winter, it resulted in a massive power shortage and they had to quickly do a 180 degrees reversal.
This current ban will serve the same purpose.
When they reverse the policy, import volumes will come roaring back with a vengeance.

This doesn't mean we ignore the long term dynamics though.
Since just a year ago, China has greatly improved coal transportation. In some counties, they no longer accept transportation by trucks. Coal has to be transported by rail, which is faster, cheaper, safer and more efficient. The more domestic coal is transported by rail, the lower the reliance on coal imports.

Geo's share price has dropped significantly in line with the overall drop in coal prices in china, yet it has hardly shown any signs of recovery despite the slight recovery in coal prices.
As stockpiles drop, the demand will come back, and prices will rise again (or at the min, volumes will increase if domestic supply is unable to match).

There are more for you ...

View more and participate in our discussion now. It's FREE.

Creating an account means you’re okay with InvestingNote's Terms and Conditions