Revival in China’s thermal coal market fueled by flagging hydropower generation

China’s electricity generation from thermal coal jumped sharply in September, registering a 12.2% year-on-year rise as power plants on the Asian country’s eastern and southern coastal flanks, boosted their consumption of imports from Australia and Indonesia.

The surge in China’s consumption of thermal coal for power generation has led to a renaissance in the Asian seaborne thermal coal market that few market analysts had predicted when the market had been mired in the doldrums in the first half of this year.

Prices for cargoes of Australian 5,500 kcal/kg NAR thermal coal delivered to ports in southern China took off dramatically in July as Beijing’s policy to restrict production from its domestic coal industry gradually tightened the market.

As a result, CFR South China cargo prices are currently trading at $92/mt, basis 5,500 kcal/kg NAR, and their highest recorded level since S&P Global Platts started to assess this price in September 2013.

Spot prices for this grade of imported thermal coal had been capped at $50/mt CFR South China during January to June this year.

Traded volumes of thermal coal for China’s import market have also recovered strongly in the second half of 2016 to date.

China’s intake of seaborne-traded coal imports grew to 8.14 million mt in September, an increase of 17% from September 2015, and bringing the January-September tally to 68.66 million mt, up 8% on-year, according to China customs data released late October.

Australia supplied 30.9 million mt of China’s thermal coal imports over the January-September period, down 9% on year, and Indonesia shipped 25.6 million mt of thermal coal to China in the same period, up 22% on the year ago period, according to a breakdown of the customs data.

The Middle Kingdom’s coal-fired power plants have been working harder to compensate for an aggressive fall in power generation from China’s hydro-electric power assets which produced 11.4% less electricity in September compared with September 2015, according to latest available data from China’s National Bureau of Statistics.

China’s hydro electricity generation tends to peak in July and August each year, except the difference this year is the drop-off in September this year has been sharper than last year.

In September 2016, China’s hydro-electric power generation assets produced 95.2 billion kWh of electricity compared with 107.5 billion kWh in September 2015.

Some market sources believe lower inflow into China’s hydro-electric dams from river systems combined with greater outflow releases have resulted in a reduction of power generation from dams this year.

Many market participants believe the scene is set for an encouraging winter season in the Chinese thermal coal market that could still surprise to the upside.