Asia seaborne coal faces strong headwinds as China's 2020 import quotas dry up

Singapore — As utility companies in China are running out of 2020 thermal coal import quotas, there is a shift towards domestic coal to cover their upcoming summer requirements, which in turn has boosted local prices, industry sources said June 10.

Chinese coal prices rose to Yuan 558/mt [$78.90/mt] FOB Qinhuangdao on June 10 from Yuan 543/mt [$76.91/mt] FOB on June 2, as many utilities have increased consumption of domestic coal either through their existing long-term contracts or from the spot market, sources in the country said.

While the exact volume of the 2020 thermal coal import quota could not be confirmed, market sources said the total import volume of 270 million mt in 2017 acted as a reference point for the 2020 import quota. From 2017, China had started enforcing various degrees of import tightening measures for coal, as it targeted to make the domestic industry more self-sufficient.

For full-year 2019, China had imported about 299.8 million mt of coal, up 6.3% year on year, preliminary data from the General Administration of Customs showed.

Over January-May this year, China's lignite and coal imports had already jumped to 148.7 million mt, up 16.8% year on year, according to GAC data. Based on the 2017 reference point, China is estimated to have used up more than 55% of its 2020 import quota by the end of May, sources said.

Following the surge in coal import volumes in the first quarter, China had imposed various measures in March to curb the inflow.

"There is greater clarity on the remaining import quotas for larger state-owned utilities, as the quotas are given to them on an annual basis. There might be pockets of fresh import quotas for smaller utilities and end-users emerging later this year, but there is no clarity on the remaining total for quotas," a Singapore-based trader said.

"Depending on the scale of the power utilities, imports quotas are given to them from one month up to a year in advance for planning and procurement purposes," he added.

The import quotas are distributed across the country and divided among the utilities.

AFFECTED PARTIES

After China introduced the measures in March to curb imports, China's state-owned utility Shazhou Electric Power canceled up to 225,000 mt of low CV Indonesian coal imports, S&P Global Platts reported June 3.

Meanwhile, power plants at Jiangsu in the east under China Huadian Corporation, and plants in southeastern China's Fujian province, were running out of import quotas for 2020, various sources said. China Huadian and Shazhou Electric declined to comment.

Power plants in southeast China's Fuzhou province under China Guodian Corporation, Fujian power plants in southeast China, and Shanghai power plants under China Huaneng Group were affected as well, sources added. China Guodian and China Huaneng were not immediately available for comment.

SUMMER ELECTRICITY DEMAND

Electricity generation had been down year on year due to the impact of the coronavirus lockdown in February and March, but Chinese power generation has rebounded and is now operating higher than pre-COVID-19 lockdown levels, according to Platts Analytics.

Meanwhile, summer electricity demand is expected to pick-up amid the shrinking import quota volume, but an industry source said heavy rain in south China has boosted hydroelectricity generation, which would replace some coal power demand.

PRICE RISE TO BE CAPPED BY HIGH STOCKS

Amid increased demand, Chinese domestic coal prices for the 5,500 kcal/kg NAR grade picked up to Yuan 558/mt FOB Qinhuangdao [$78.90/mt] June 10, up Yuan 90/mt [$12.73/mt] from when domestic coal prices first crossed over the red zone of Yuan 470/mt FOB [$66.56/mt] on May 4, sources said.

The National Development and Reform Commission, Beijing's top economic planning agency for regulating Chinese domestic coal prices, could intervene in the market if Qinhuangdao 5,500 kcal/kg NAR spot prices trade higher than Yuan 600/mt FOB [$84.97/mt] or lower than Yuan 470/mt FOB [$66.56/mt] for a prolonged period of time.

While the price arbitrage window between Chinese domestic and seaborne thermal coal remains open, Chinese utilities remain well-stocked. This, together with import quotas, will cap any upside in imports and prices, Platts Analytics Head of Global Coal Matthew Boyle said June 10.

Chinese domestic coal production from January to May edged up 3.8% on the year to 1.15 billion mt, according to Platts Analytics, with full-year Chinese domestic raw coal production forecast to rise 4% year on year to 3.85 billion mt.

"We do not believe China requires this coal, and import port quotas will be enforced," Boyle added.

Looking at the longer term, a trader said: "Chinese domestic coal production and consumption will continue to grow while seaborne coal exports will face stronger headwinds as China tries to be self-sufficient with coal."