China coal market slumps as shale gas booms

Global coal prices shrunk 10% and the situation may worsen for China even before it gets back on track.

In a release by Nomura, it was found out that increased US supply of coal, at a time when EU demand is weak, has caused more coal to be diverted to Asia, creating a glut in the Asia-Pacific region as China’s power generation slows. 

Here's more from Nomura:

With global coal prices now 10% cheaper, we expect softer domestic coal prices through the summer before China’s coal market shifts back into balance on supply response.

Chinese spot coal price could test CNY600-630/t in 3Q. Chinese prices are already at CNY680/t (vs Dec 08 low of CNY451/t) and Newcastle is at USD85/t (vs Dec 08 low of USD60/t), vs marginal costs of CNY600-630/t in Shanxi/Shaanxi, CNY439/t in Inner Mongolia and USD80-85/t in Australia. Thus, we see limited downside risk for seaborne but up to a further 10-15% downside for Chinese prices (to CNY600-630/t, vs 2012 contract price of CNY599/t and our previous target of CNY720/t).

Chinese coal market to remain challenging in 3Q In our view, this is due to: 1) lower power-demand growth q-q; 2) hydroutilisation (rainfall) has grown since May (peak should be in Sept-Oct); 3) railway congestion and 3-26 April DaQin railway maintenance has passed; 4) more non-coal-fired power alternatives - hydro, wind, nuclear - should be commissioned in 2H; 5) rising cheap seaborne coal imports will likely drag down domestic prices and narrow the price gap; 6) power shortages during summer are not likely to be as severe as we had expected earlier; and 7) 1H12 results to be announced in August may fall below consensus.

We remain cautious and do not dismiss the chance that spot coal prices will overshoot below the marginal cash cost. However, deep-pocketed investors with two- to three-year investment horizons may want to accumulate good names on weakness, but the road to recovery is bumpy and China’s coal sector should be de-rated on the back of shrinking margins (weak ASP + rising cost) and slowing volume growth over the next two years. As well, coal prices may fall more in 2015-16F as transportation bottlenecks are resolved.