Thermal coal prices losing steam as China output rises: Citi

Newcastle coal prices dropped 11% at $101/mt FOB.

Global thermal coal prices are poised for a possible southbound trek with China's imports expected to sag amidst rising domestic output, Citi analysts said.

"The heady days of very high coal prices could be numbered due to a boost in Chinese coal production, easing of weather disruptions, stabilization of electricity markets and sharp appreciation of the US dollar," the analysts said.

Thermal coal prices have nearly doubled since the start of this year as China reduced its domestic output and weather disruptions at various producing regions led to a tightness in supply.

"The Chinese production cut story, which has been the primary driver of the coal price surge, may have run its course for thermal coal," the analysts said.

China's output started to rise in August, accelerating in October when the National Development Reform Commission allowed supply additions by over 30m mt/month compared with a deficit of 15m mt to 25m mt/month earlier in the year, the analysts noted.

"In addition, some new capacity, which was supposed to be added only if equivalent amount of old capacity was phased out, reportedly started to ramp up unconditionally in recent weeks to solve the supply tightness," they said. "Although volumes added from these new mines are uncertain, we believe at least 4m mt/month could be easily achieved."

The 90-day price of Newcastle 6,300 kcal/kg GAR has more than doubled since the start of this year, S&P Global Platts data showed. However, the price has dropped 11% since November 8, 2016, to be assessed Tuesday at $101/mt FOB, the data showed.

"The normalization in prices could take some time, as challenging weather in key production countries persists while tightness in global electricity markets, from Europe to South Korea to China, particularly as we approach the Northern Hemisphere winter, could offer support from the demand side," the analysts noted.

"But even with prices starting to come off their multi-year highs, it will likely take time for prices to normalize."

The analysts expect 2017 Newcastle coal prices to average $72/mt FOB.

"Chinese thermal coal prices may have also reached their tipping point in early November thanks in part to government intervention in the physical and futures markets," the analysts said. China's major coal miners, including Shenhua Group and China National Coal Group, have signed contracts with major power generators to supply 5,500 kcal/kg NAR coal cargoes for 2017 at Yuan 535/mt ($77.89/mt), sharply lower than current spot market price levels, following intervention from NDRC.

The contracted volumes account for 40% of the domestic thermal coal demand for 2017 from the power sector, the analysts noted.

Platts assessed the price of PCC 1 -- FOB Qinhuangdao 5,500 kcal/kg NAR coal -- at Yuan 725/mt Tuesday, down Yuan 25/mt from Monday, but nearly double from Yuan 365/mt assessed on January 4, 2016.