China coal futures slump as govt announces ‘clean up’ of illegal storage sites

October 27, 2021

BEIJING (Reuters) -China’s thermal coal futures slumped to their lowest in more than a month on Wednesday, marking a sixth consecutive day of declines, after the country’s state planner said it would conduct “clean up and rectification” work on coal storage sites.

The most-traded thermal coal futures contract on the Zhengzhou Commodity Exchange fell 10%, hitting its daily trading limit on Wednesday.

The contract is down more than 40% from the record highs hit last week on the back of a coal supply shortage but it is still up by more than double since the start of the year.

Spot coal prices hit a record premium over the most active thermal coal futures contract on Monday, with trading drying up as Beijing launched a probe into price index providers.

The country’s top economic planner, the National Development & Reform Commission said it would investigate the spread of “fabricated” price information. The agency is also studying a new mechanism to guide coal prices within a reasonable range over the long term.

A slew of government measures in the last few days has seen open interest in thermal coal futures fall sharply as players liquidated positions.

The probe left coal traders scrambling for price information on spot transactions, and one Shanghai-based trader described the market as “chaotic and pessimistic.” [L4N2RM2A0]

Other commodities futures prices followed thermal coal, trading largely in the red on Wednesday morning. Coking coal and coke futures also hit their limit down of 9%, while liquefied petroleum gas closed down 6.33%.

Petrochemicals such as methanol and ethylene glycol closed down 9.03% and 7.25% respectively, while urea, which uses coal as feedstock, declined 7.25%.

China, the world’s biggest producer and consumer of coal, has been grappling with a power crunch. Coal-fired power accounts for about 60% of the country’s total electricity generation, leading to electricity rationing for industry in many regions and hurting growth in the world’s second-largest economy.

Beijing has taken a raft of measures to raise coal and power supplies, including approving new coal mines and allowing power firms to raise prices for customers.

In its latest move, China’s state planner said it will conduct “clean up and rectification” work on coal storage sites in some coal-producing areas and ban storage sites without approvals in its latest move to address skyrocketing coal prices.

The NDRC said in a statement late Tuesday that there were many unlicensed coal storage sites around mines in the main producing areas of Shanxi, Shaanxi and Inner Mongolia, “making it convenient for illegal traders to hoard coal,” and “seriously disrupting” the market’s operations.

Besides stepping up investigations and strengthening supervision, the three areas also need to establish a reporting system for legal and compliant coal storage sites, and ban those without approvals, the NDRC said.

They should also crack down on illegal profit-making activities such as hoarding and driving up coal prices by using illegal coal storage sites, the statement said.

In a bid to ease the supply crunch, China has been pushing coal miners to ramp up output and increasing imports so power stations can rebuild stockpiles before the winter heating season, but analysts say shortages are likely to persist for at least another few months.

Average coal prices for next year are forecast to ease to 700 yuan from 912 yuan in 2021, Morgan Stanley said in a research note to clients on Tuesday.

“We highlight the risk of disappointing average selling prices for coal miners on the back of government intervention,” it said.

“Near term, we see policy measures increasing the incentive for producers to push coal production higher for the winter peak season,” it added, adding that moderating demand will further narrow the supply-demand gap.

Profits at China’s industrial firms rose at a faster pace in September despite surging prices and supply bottlenecks, mainly due to stellar growth in mining and raw materials industries, although power firms profits were squeezed as they struggled to shake off the high costs of coal.

(Reporting by Shivani Singh in Beijing and Shanghai newsroom. Editing by Gerry Doyle & Simon Cameron-Moore)

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