21 February 2019

Coal sector warming up, for now

Coal stocks have been regaining lost ground as some supportive policies from the Chinese government came as a confidence booster for the sector that has been struggling with overcapacity.

The State Council outlined on Nov. 27 five measures to help the coal sector deal with its difficulties. Under the plan, authorities would firmly contain unchecked growth in coal output and reduce the industry’s tax burden. Also, there will be optimization of tariffs on imported coal and a ban on import of low-quality coal products.

Another guideline states that approvals for new coal mines with production capacity under 300,000 tons a year will be suspended. Meanwhile, coal producers will be encouraged to integrate and achieve better scale of production.

Riding on the policy hopes, China Coal Energy (01898.HK) and China Shenhua Energy (01088.HK) saw notable increase in their share prices, taking their monthly gain to about 10 percent.

Along with the policy initiative, a surge in infrastructure projects and the consequent rise in cement sector activities also helped. The extremely cold weather in China at the moment gave coal price an additional push.

Thermal coal inventory at major coal port Qinhuangdao has fallen below the critical level of 500 tons, to 485 tons, according to reports. Bohai Rim Steam Coal Price Index, a widely-quoted benchmark for China’s thermal coal market, has been on the rise for seven consecutive weeks, the first time such a thing happened since 2011.

While the sector’s prospects do appear to be improving, there are some doubts however whether the recent share price rebound can sustain. Rather than boosting long-term demand for coal, Beijing is actually looking to lower the dependence on the highly polluting coal and replace it with cleaner energy, like wind, solar or gas. Excess capacity in coal mining built up over the past few years could take a long period to be fully digested.

– Contact the writer at [email protected]


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