The Chinese thermal coal market is seeing some positive fundamental trends in the near term, helped by coal investment cuts, production declines and a slowdown in imports, even as seasonal weakness is expected to weigh on the market, an analyst at UOBKayHian said in a note Thursday.
"Due to the poor profitability of coal mining, coal investment has declined," analyst Helen Lau said.
The Platts/Fenwei China Coal Index (CCI1) has shed more than 15% so far this year to Yuan 526.50/mt, Platts data showed.
China's January-April investment in coal mining declined 1.4% year on year, and production in the same period fell 1% to 1,179 million mt, Lau said. Total coal shipments also fell 0.9% on year, she added.
"China's slowdown in coal production and coal shipment growth did not make room for more coal imports," the analyst said, adding that China's imports rose only 2% year on year in January-April compared with a 26% jump in the same period last year.
Growth in imports of Indonesian coal, which accounts for 43% of China's total coal imports, slowed in the first quarter to only 6% year on year, compared with a 30% growth seen in the same period last year, she said.
"Going forward, low domestic coal prices and renminbi depreciation will continue to dampen coal imports," Lau said.
The analyst also said that supportive government policies were also boosting sentiment, citing China's NDRC's move to set up two or three national coal trading centres for spot coal and futures transactions.
The NDRC move will help consolidate the marketplace and foster a more orderly and transparent coal market, with coal prices better reflecting supply and demand, Lau said.
Coal companies will benefit by hedging coal sales with future prices locked in, whereas independent power plants will also reduce the risk of coal shortage and lock in purchase cost when price rises, the analyst said.
Meanwhile, some local governments have also acted to help boost the local coal sector. Shanxi Province last week announced a reduction in local levies on coal companies and waived some administrative charges, according to media reports.
Between August and December last year, the Shanxi government suspended the collection of environmental protection fees and industrial transformation development fees from coal mines -- amounting to a total of Yuan 15/mt -- and cut coal trading service fees by 50% to boost the local coal market.
"Overall, we think the coal sector faces limited negative surprises going forward with coal price downside limited," Lau said.
