Chinese Growth Welcome News for Coal Producers

The re-emergence of growth in China’s economy will come as relief to many coal producers, but analysts caution that a quick recovery in coal prices is unlikely.

Following 13 months, or seven consecutive quarters, of slowing manufacturing growth, China finally recorded accelerating growth in its critical industrial sector.

The HSBC Flash China Purchasing Managers’ Index rose to 50.4 in November, which indicates an accelerating growth rate, after showing signs of increase for the past three months. State-led growth programs are held as key catalysts for this growth, and are pushing the world’s second-largest economy back towards upping its sliding GDP.

But despite positive economic signs from the world’s largest coal consumer, substantial outstanding thermal coal surpluses — the leading energy source for factories in China — mean that any industrial or manufacturing growth is unlikely to translate to higher coal prices for some time yet.

China is “awash with coal” James Stevenson, a researcher with IHS McCloskey, told Bloomberg this week. “We’re seeing China’s growth slowing. China’s oversupply will reverberate around the world in the second half. That’s tanked international prices.”

Coal inventories in China’s major power plants reached 93.71 million metric tons at the end of October, or the equivalent of 29 days’ usage, eight days more than the same period last year, Morning Whistle reported.

In late November, Reuters reported that traders in China defaulted on at least three Australian thermal coal shipments as high stocks and low regional coal prices pushed some buyers out of the market.

On the whole, China’s net coal imports have increased by 39.5 percent so far this year, to 217 million tons, according to data released by the National Development and Reform Commission this week.

Recent growth notwithstanding, China’s economic growth has stalled overall this year, averaging just 7.4 percent in the three months through September compared to 9.1 percent a year before.

As a result, coal consumption in the country has fallen, bringing down international prices with it.

For the past six months, China’s benchmark coal price has hovered around the 635 to 645 yuan (US$104)/tonne range for 5,500 kcal/kg coal. These prices are down 215 yuan from last year at this time and 165 yuan since the beginning of the year.

Slowdown hits producers

Declining coal prices coupled with rising operational costs in key production locations have led major producers to rethink whether their portfolios should include coal.

BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) announced this week that it will limit its spending on growing its thermal coal assets as it attempts to balance the environmental impact of burning the fuel to produce energy.

Rio Tinto (NYSE:RIO,LSE:RIO,ASX:RIO) CEO Tom Albanese has also said that the company’s recently announced aim of cutting more than $5 billion worth of operating and support costs by the end of 2014 will likely include significant cuts to coal production in Australia.

Both Rio and BHP have already shuttered a number of Australian coal operations this year due to rising labor costs, the high Australian dollar and infrastructure bottlenecks.

Rio closed its Blair Athol mine earlier this year and its Mount Pleasant Greenfield development is now also under review as part of the company’s efforts to cut spending on exploration and evaluation projects by $1 billion in 2013 and the last month of 2012.

China remains a critical component to coal producers’ bottom line. If current resurgent growth in China can sustain itself and spread into the private sector — and not just fiscal or monetary stimulus — producers could see prices rise alongside demand as early as mid-2013.

 

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.