Chinese policies expected to support a medium-term thermal coal price of US$73/tonne

This level balances break-even prices among coal mines and coal-fired power plants.

According to Wood Mackenzie's recent report "China's coal policies rescue the thermal coal market," China's domestic benchmark thermal coal price is sustainable at RMB515/tonne in the medium term.

This price level represents the balance in the break-even prices between coal mines and coal-fired power plants in the main regions of China, and equates to a benchmark Newcastle thermal coal price of US$73/tonne FOB, a 46% improvement over the sub-US$50/tonne price level earlier this year.

The higher benchmark price bodes well for the seaborne market as 98% of the seaborne thermal coal market is expected to be cash positive.

Rory Simington, Principal Analyst, Mining & Metals Fundamentals Research said, "The size of China's domestic coal market compared to the seaborne market means that its role as a major driver of price formation will continue. Over the last year, we have witnessed several rounds of Chinese government interventions in the coal sector which resulted in prices almost doubling to RMB616/tonne in October compared to RMB365/tonne in January."

Wood Mackenzie expects the Chinese government to support a price well above 2016 lows as it balances maintaining positive cash flows for a majority of coal producers and margins of the utility sector which affect energy prices.

This higher benchmark price would still support the Chinese government's push for supply rationalisation in the domestic coal sector as at this price level there is over 700 million tonnes of Chinese thermal coal production earning negative cash margins.

For coal producers, the government may be inclined to assist them in reducing their significant debt burden and increasing their ability to cut excess capacity while maintaining a healthy workforce. A higher coal price could also encourage generators to better control their fuel costs and rationalise their plans for building more coal-fired power plants. A robust coal-fired power plant sector could also better support China's renewables strategy and cut curtailments in the long run.

"We expect the Chinese government policy to support higher price levels over the medium term and provide a much more positive outlook for a sector that has been under much pressure of late. However, there is also a significant likelihood of continued price volatility in the seaborne market as the Chinese government adjusts its policy to achieve desired domestic outcomes." said Simington.