The main domestic thermal futures contract on the Zhengzhou Commodity Exchange (ZCE) ended at 1,305.6 yuan ($ 204.45) per share. tons on Monday, after slipping for four consecutive days since reaching its highest level of 1,982 yuan on October 19.
It continued its decline in early Asian trade on Tuesday, falling as low as 1,207 yuan per share. tons before stabilizing around 1,247 yuan.
But context is everything, and there are two main factors that are worth keeping in mind when interpreting the fall in the futures contract.
The first is that the contract for the first month has still risen 192% from its low point in 2021 at 446.6 yuan per share. tonnes on 23 February, which means that prices are still at extremely high levels.
The second is that the ZCE contract is primarily an investment tool for the Chinese domestic market and in fact does not necessarily reflect the realities on the spot in the country’s coal market.
The ZCE contract currently listed expires on January 10 next year, and therefore reflects a price expectation of how coal will be at the time the contract holder can in theory receive the fuel.
A better indicator of the price of coal right now is the range of spot prices produced by different providers to several different physical delivery points in China, the world’s largest producer, importer and consumer of coal.
One of these benchmarks is the spot price for delivery at the port of Qinhuangdao in northern China, as assessed by consultants Steelhome.
This measure ended at 2,100 yuan per. tons on Monday, a 17.5% drop from the record high of 2,545 yuan on October 19.
Qinhuangdao coal is still up 266% from its lowest level in 2021 at 573 yuan per share. tons on March 2 and still more than double the previous winter’s high of 1,038 yuan per tonne. tonnes on 19 January.
The current price is also almost four times the range of around 530 to 580 yuan a ton, which the market has long seen as the price the authorities are most comfortable with, as it allows both domestic miners and power companies to be profitable.
The striking point from the current spot price is that physical coal in China remains extremely expensive on a historical basis, and the fall from the record high will have to run much further to bring prices back to more normal levels.
That’s why China’s state planner, the National Development and Reform Commission, said on Monday it would investigate complaints that some energy information providers, including in the coal sector, had used fake transaction prices, published “hearsay” information and “fabricated” price data and had “manipulated price index”.
This is another warning shot designed to lower the market, and like other efforts by Beijing, it is likely to have some success in the short term as traders are wary of angering the powerful central authorities.
But in order for any fall in prices to be sustained, the coal supply must ultimately be at levels sufficient to meet demand, a process that may take several more months.
China is pushing miners to increase production after effectively curtailing it earlier this year through security inspections, but this is a slow process.
China’s coal production in September was 334.01 million tonnes, down from 335.24 million in August (although slightly higher on a daily basis) and well below the record of 351.89 million in December last year.
Coal imports are also struggling to help ease the shortfall, with China scoring some of its own goals with its unofficial ban on cargo from Australia, which used to be its second-largest supplier behind Indonesia.
China’s total coal imports from the seaborne market are estimated at 29.96 million tonnes in October by commodity consultant Kpler, up from 27.91 million in September but under August 32.47 million.
(Editing Lincoln Feast)