Coal industry executives in Shanxi Province, the second-largest coal producing region in China by output, expect domestic prices to continue falling in the second half (H2) of the year amid sluggish demand and rising imports, according to a survey conducted by the regional government's commerce department.
Approximately 80 percent of respondents said there will be an oversupply in the coal market in H2. The executives also don't expect a production cap to support coal prices that have fallen by more than 25 percent this year to have much of a positive effect.
The findings reflect the generally pessimistic market view about coal prices and follow similar predictions made by industry officials from Shanxi and Inner Mongolia Autonomous Region last week.
"Coal consumption is likely to fall on a monthly basis in September and October as the peak power use period has passed and coal prices will therefore face further pressures in H2, although consumption will pick up a little in winter,' coal analyst Zhang Zhibin told Interfax on Wednesday.
"We can't expect much improvement in the thermal coal market in the current economic environment,' Li Guang, a researcher with the China Coal Transportation and Development Association, wrote in a note last week.
Thermal power plants, which produce 70 percent of China's power and account for the majority of coal purchases, are not replenishing stocks because inventories are already higher than normal and demand is not forecast to pick up anytime soon.
Domestic power output in August declined 2.03 percent on a monthly basis and analysts told Interfax last week that China is likely to miss the power production target for 2012 set by the State Electricity Regulatory Commission.
Surging purchases of cheap overseas coal will heap more pressure on the domestic coal market, noted Zhang. Imports were up 55.5 percent year-on-year in the first seven months, according to statistics from the General Administration of Customs.
Even as the domestic economy slows China is still a huge magnet for international coal miners. Australia and Indonesia are shipping record amounts of the fuel while U.S. firms are looking to sell coal to Asia as cheap gas prices from the domestic shale gas boom crimp sales at home.
Zhang also dismissed speculation that China will restore customs duties on coal imports that were abolished in 2008 to boost energy supplies. "Overseas purchases will bring domestic coal prices back down to a reasonable level which is necessary because coal enterprises enjoyed unsustainably high profits over the past decade.'
Analysts expect giant coal enterprises that have diversified business interests such as Shanghai and Hong Kong Stock Exchange-listed China Shenhua Energy Co. Ltd. to ride out the downturn, while smaller-scale miners will close or get bought out as industry consolidation picks up.
UOB Kay Hian analyst Helen Lau maintained her "buy' rating on Shenhua Energy on Monday, saying that "stronger than expected power generation in [the first eight months of year] will continue to outshine its coal business which is currently suffering from weak coal prices and demand.'