Column: China wants to cool coal prices. Similar moves for metals, crude failed: Russell

A loader is seen amid a pile of coal at a port in Lianyungang, Jiangsu province, China, January 25, 2018. REUTERS / Stringer

LAUNCESTON, Australia, October 21 (Reuters) – China’s latest attempt to lower commodity prices, this time for thermal coal, is expected to follow a familiar pattern of initial success followed by failure.

So far this year, Beijing has acted to cool the prices of metals such as copper, aluminum, zinc and iron ore, and for energy products such as crude oil and now coal.

Each intervention met with some success at first, but over time prices returned to their previous upward trends.

The exception is when the fundamentals of supply and demand actually change, as happened with iron ore, which fell sharply from its all-time high after China effectively cut production of steel, and raw material supplies have recovered after disruptions among major Australian and Brazilian exporters.

Beijing’s latest target is thermal coal, which has reached record levels amid strong growth in electricity demand and slower growth in domestic mining production as part of official measures to deactivate some mines or to expand safety controls, and to limit overall production in order to reduce air pollution.

Coal futures on the Zhengzhou Commodity Exchange hit a record 1,982 yuan ($ 310.17) per tonne on October 19, but have since fallen nearly 20% to 1,587.4 yuan in trading Thursday morning, following a statement by the Chinese state planner that he is considering ways to intervene in the market. Read more

While this 20% drop seems pretty dramatic, it should be noted that coal futures are still up over 200% so far this year, a massive increase that has ripple effects in the whole economy as the costs of energy-intensive industries rise and electricity is rationed in parts of China, disrupting industrial production.

The physical prices of thermal coal in China have also not kept up with lower futures prices following the threat of government intervention, coal in north central Qinhuangdao, as assessed by Steel consultants. Home, hitting a new record of 2,545 yuan per ton on Wednesday. , up 7.2% from the previous day.

Until the coal crisis became evident from around May, Qinhuangdao’s price had only briefly exceeded 1,000 yuan per ton once, in January of this year during the winter more cold than usual.

It was a long-held slogan in the market that authorities aimed to trade physical thermal coal in a range of around 530 to 580 yuan per tonne, a level believed to keep mines and utilities profitable while providing electricity. electricity at a reasonable price.

Current prices show how far ideal thermal coal has strayed, and while Beijing may manage to cap the rally, it will take a fundamental shift in underlying market dynamics for coal to return to more normal levels. .

Foremost among them is that supply needs to improve, and although national coal miners pledge to do everything possible to increase production, it will take several months for the impact to be felt.

China’s unofficial ban on coal imports from Australia, which was its second-largest supplier after Indonesia, in an ongoing political dispute with Canberra is also not helping, serving to increase shipping prices as traders try to buy alternatives from other suppliers, such as Russia.

It would appear that in the absence of a substantial change in thermal coal supply, or demand, Beijing’s efforts to cool prices will be short-lived, or they will need to be much more dramatic, like price controls.

INTERVENTION FAILURES

When China revealed its intention to auction metals such as copper, aluminum and zinc from state reserves in June, again to calm what were seen as excessive price hikes, there had some initial declines in domestic prices.

Shanghai copper futures fell 13.6% from an all-time high of 76,930 yuan per tonne on May 10 to a recent low of 66,470 yuan on August 20.

However, since then they have recovered to close at 73,640 yuan per ton on Wednesday, within an observation distance of the previous record.

With aluminum futures, Beijing auctions only appeared to keep prices stable for a while before the recovery resumed, with the first month’s contract hitting its highest level in 13 years, closing at 24,330 yuan per ton on October 19. It has since fallen slightly, ending at 23,390 yuan on Wednesday.

For crude oil, the announcement of strategic reserve sales in September also did not shake the existing rally in benchmark global Brent futures, despite China’s status as the world’s largest importer.

Brent contracts closed at $ 85.82 a barrel on Wednesday, down from $ 72.92 on September 10, the day Beijing announced crude oil sales.

The overall message is clear, Beijing’s intervention in markets rarely works for more than a short period of time, and it takes a shift in the fundamentals of supply and demand to make a lasting difference.

Editing by Kim Coghill

Our Standards: Thomson Reuters Trust Principles.

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