China: Declining thermal power demand threatens steam coal market

Thermal coal prices in China have generally trended downward so far this month, defying previous expectations of strong hikes in the typical peak season for electricity generation that continues through August, Mysteel Global notes.

Prices for the benchmark 5,500 kcal/kg NAR thermal coal traded at northern China's ports entered this month at Yuan 880/tonne ($121/t) but by June 26 had slipped to Yuan 860/t, according to Mysteel's assessment. This marks a deviation from the uptick observed in June 2023, when prices rose from Yuan 770/t to Yuan 840/t during the month in lieu of strengthening demand from utilities firms building stocks for summer. The dip this month suggests a shift in market dynamics, industry watchers say.

In May, power generation from all sources in China increased by 2.3% on year to 717.9 billion kWh, while thermal power generation- primarily coal-based-declined by 4.3% to 453.8 billion kWh, marking the first year-on-year decline since August 2023, data from the National Bureau of Statistics (NBS) shows.

The shift can be attributed partly to significant increases in hydropower and solar generation in China's overall energy mix, with hydropower's contribution jumping 38.6% on year to 115.0 billion kWh in May and solar's rising 29.1% to 35.9 billion kWh.

South and Southwest China have entered the rainy season since the end of March, characterized by extensive precipitation, especially in hydro-rich regions such as the southwestern provinces of Yunnan and Sichuan, Mysteel Global notes.

This month, the China Meteorological Administration has frequently issued rainstorm warnings for China's South and East regions, with the result that dams are filling to high levels and offer the promise of strong hydropower generation during the month.

In addition, production activity in other sectors such as construction materials remained subdued, providing limited support to thermal coal demand. For example, the NBS data showed an 8.2% decline in cement output last month compared to May 2023 production.

Similarly, although the coal chemical sector saw modest growth in May-with nitrogen fertilizer and methanol production up by 9.8% and 10.6%, respectively-this sector's overall impact on coal demand remains limited due to its smaller share in the consumption mix.

Meanwhile, China's total production of raw coal in May decreased by 0.8% year on year to 380 million tonnes, contributing to a cumulative 3.0% decline in the first five months of the year.

Consequently, market insiders hold a cautious outlook over the near-term steam coal market, pointing out that currently, coal stockpiles are hovering around high levels at ports and power stations. As of June 21, coal stocks at the 283 utilities firms that Mysteel samples weekly reached the equivalent to 24.3 days of use on average, compared with 20.3 days a year earlier.

Furthermore, non-power sectors like cement are unlikely to provide substantial support, as summer typically sees reduced outdoor construction activity, Mysteel Global notes.

Note: This article has been written in accordance with an article exchange agreement between Mysteel Global and BigMint.