Fitch Ratings-Shanghai/Hong Kong/Singapore-09 September 2016: Fitch Ratings says the strong rebound in key Asian thermal coal reference prices since the beginning of this year is a function of the Chinese government’s regulations surrounding supply management, and is not supported by improvements in demand fundamentals. The price increases have raised the risk of slowing, if not, halting Beijing’s supply-side structural reforms in the coal sector.
China’s coal production dropped 9.7% yoy in 1H16 due to government regulation to cut the number of statutory working days for coal miners to 276 a year from 330 in April. This policy appears to have been effective, with domestic production contracting more than demand, which fell 4.6% yoy. Falling inventory and a wider gap between domestic coal and sea-borne cargo prices drove import volume up by 8.2% yoy in 1H16. This added only 8.16 million tonnes to China’s coal import volumes during 1H16 versus 1H15; but it had a big impact on Asia-Pacific seaborne prices indices, with the benchmark Newcastle 6,000 kcal free-on-board prices rising 31% from end-May to early September. China’s Qinhuangdao 5,500kcal/kg coal prices also climbed 33% over the same period.
The tighter supply in China, however, is susceptible to policy changes. China’s available capacity remains more than adequate with only 95 million tonnes of excess capacity eliminated in 7M16, or 38% of the government’s phase-out target for 2016. The Vice Director of the National Development and Reform Commission Mr. Lian Weiliang has been reported as saying that coal prices should not appreciate too much or it would hinder the progress of industry consolidation. The Shanghai Securities Journal reported the government is in discussions with major coal miners to increase flexibility in the working-day controls to manage risks from higher prices de-railing the supply cuts.
Some Chinese coal companies have become more comfortable raising capex after the recent price rebound. China Shenhua Energy Company Limited (Shenhua, A+/Negative) raised its 2016 capex by 37.5% to CNY27.5bn, although 75% of this relates to its investments in power generation capacity. Yanzhou Coal Mining Company Limited (Yanzhou Coal, B/Negative) raised its already aggressive 2016 capex by 10.6% to CNY9.4bn. Most coal producers continue to struggle with weak cash flows and heavy debt loads. As such, Fitch believes that most companies will not aggressively increase capex until there is more certainty on sustainability of the coal price gains seen in recent months.
Indonesian coal miners benefited less from the recent price rebound because India, which purchased 37% of Indonesian coal exports in 2015, is pushing to become more self-sufficient in the commodity. India’s doubling of a volume-based clean-energy tax to IDR400 per tonne (USD6.0) in February hurt demand for Indonesia’s low heat value coal. India has increased imports from South Africa, which exports coal of higher energy content. Australia, again an exporter of high-quality-high-energy coal has largely maintained its export volumes to its key customers, which are mostly utilities from Japan, South Korea and Taiwan. Indonesian coal production and exports fell 10.5% and 14.3% yoy, respectively in 4M16.
The increase in coal prices helped the operating cash generation of rated thermal coal producers in Asia-Pacific – Shenhua, Yanzhou Coal and Indonesia’s PT Indika Energy Tbk (Indika, CCC). However, the price outlook remains uncertain and challenging. Shenhua continues to maintain a strong balance sheet; however, Yanzhou Coal and Indika will continue to face significant liquidity and refinancing challenges.
Link to Fitch Ratings’ Report: APAC Thermal Coal Dashboard 1H16
Fitch’s "APAC Thermal Coal Dashboard" is available on www.fitchratings.com or by clicking on the link in this media release.
Fitch Ratings (Beijing) Limited, Shanghai Branch