China will stick with coal production curbs until next year even as prices continue to climb because of tight supplies with state planners blaming recent moves on speculators.
The National Development and Reform Commission, the nation’s top planning body, said on Wednesday it would extend by three months until the end of March its operating restrictions on coal mines.
“Coal cannot sustain the current irrational price,” Xu Kunlin, vice secretary of the NDRC, told reporters. “The current increasing price of coal will not dampen the determination to cut coal capacity.”
Thermal coal, burnt in power stations to generate electricity, has more than doubled to $110 a tonne in Asia, while coking coal, a key steelmaking ingredient, has rocketed more almost 300 per cent to above $300 a tonne in the global export market.
The steep rise in prices has already led the NDRC to gradually relax strict output restrictions, which limit mines’ operations to between 276 and 330 days per year.
Eight hundred mines are being allowed to increase their working days, a move that could theoretically increasing effective production capacity by 300m tonnes a year. However, it will take time for that supply to hit the market.
“Some market entities are taking advantage of the increasing prices of coal to do speculative trading and hoard coal,” said Zhang Manying, deputy director of the price supervision bureau at the NDRC.
Falling production at the end of the summer opened the way for traders to place bets on coking coal derivatives. Similar well-placed bets in January led to a sharp run-up in Chinese steel futures contracts in the first four months of this year, improving profitability for steel mills and hampering Beijing’s ability to impose capacity cuts.
In an effort to limit speculation by retail investors, Zhengzhou Commodity Exchange raised fees for trading in coal futures several times in recent weeks.
“There are few fundamental mechanisms that can cap pricing,” said Dan Klein, managing director of PIRA Energy Group, a division of S&P Global Platts, who believes domestic coal production will remain low through the end of 2016.
Many mines in northern China reduce operations in the winter because the deep freeze affects water supply
Henry Liu, research director at CEBM in Shanghai, said he expected prices to remain strong through the end of 2016 but dip in the first quarter of 2017, giving the NDRC some breathing room. “Now it looks as through it won’t drop through December, because of the winter and the ramp-up time needed for production to come online,” he said.
China’s ageing state-owned coal mines are at the centre of a national plan announced early this year to cut excess capacity. But the working day restrictions, have come at the same time as slumping prices and high debt have forced smaller private mines in China out of the market, while restrictions on coal truck traffic have slowed transport.
International coal producers have been slow to fill the supply gap because they have slashed spending on new mines and expansion after a five-year downturn in prices.
Additional reporting by Archie Zhang and Neil Hume
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