China coal markets long-term outlook H1 2015 Report

Commodity Market Report 17 July 2015

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Report summary

Slowing economic growth and its decoupling from energy demand have considerably weakened coal demand. Thermal coal demand in 2014 contracted for the first time since 1998 while metallurgical coal demand remained flat. Chinese miners are battling for survival in the current low price environment; nearly 80% of thermal coal mines and 35% of metallurgical coal mines are cash negative. Absent underlying demand improvement or supply rationalization, a recovery in coal prices looks a distant dream.

Executive summary
- Key themes
  - Government policies are not solving China's oversupplied market
  - Environmental policies: targets emerge, but detail is sparse
  - Power reform in early stages, but could be a further drag on coal long term
- Changes from the previous outlook
Economic outlook
Prices
- Prices and politics usher in deflation, with recovery around 2020
- Domestic thermal coal price forecast
- Domestic hard coking coal price forecast
- Seaborne thermal coal price forecast
- Seaborne metallurgical coal price forecast
Demand
- Thermal summary
  - Thermal coal demand - regional analysis
  - Coastal region
  - Central region
  - North region
  - Northeast region
  - West region
- Metallurgical summary
  - A weak property market pushes demand lower
- Environment and market forces pressure metallurgical coal demand
  - There will be consecutive new demand for seaborne metallurgical coal from two projects
  - Metallurgical coal demand in China expected to peak in 2023
- Metallurgical coal demand – regional analysis
  - North region
  - North-east region
  - Coastal region
  - Central region
  - West region
Supply
- Thermal coal supply
- Metallurgic coal supply
Infrastructure
- Railroads
  - Weak coal demand will lower rail capacity utilization
- Power transmission
- Ports
Trade
- Thermal coal
- Metallurgical coal
Supply-demand balances
Risks and uncertainties
- Coal vs environment: majority of risks point to downside for coal demand
  - Carbon emission reduction plans may evolve faster than in our base case
  - Renewables penetration and UHV transmission expansion in power markets
  - Coal quality as a problem and reshaping the future in an ultra-low emissions world
  - The trade-off between fears of nuclear plant development and increased coal consumption is hard to assess
- Government intervention, and the pace and scale of market reforms
  - China may take drastic steps to insulate its domestic industry from coal imports
  - Traditional relationships between economic growth and power generation may be changing: the rate at which emerging economies decouple economic growth from electricity generation may be different than we forecast
  - Continual cost deflation: advances in equipment utilisation, extended diesel downside, further productivity gains, technological improvement

Tables and charts

This report includes 43 images and tables including:

Economic indicators
Thermal supply demand balance, Mt
Metallurgical supply demand balance, Mt

Risks assessment, H1 2015
Thermal coal demand - power sector (Mt)
Thermal coal demand - non-power sector (Mt)
Domestic thermal coal supply (Mt)
Seaborne thermal coal imports (Mt)
Domestic spot price vs long-term contract (RMB/t)
Market discount to FOB QHD (after energy adjustment)
Domestic coal prices, RMB/t - history (nominal) and forecast (real 2015)
Seaborne thermal coal price forecast (US$/t, Real 2015)
Seaborne metallurgical coal price forecast (US$/t, Real 2015)
Installed capacity by fuel type (GW)
Power generation by fuel type (TWh)
Total thermal coal demand (Mt)
Thermal coal demand - non-power sector (Mt)
Thermal coal production by province, Mt
Thermal coal seaborne imports by country and rank, Mt
Thermal coal landborne imports by country, Mt
Metallurgical coal production by province , Mt
Metallurgical coal imports by country, Mt
Metallurgical coal imports by rank, Mt
Power transmission import by region and power source (TWh)
Forecast loading port capacity in north China (Mt)
2014 thermal coal trade flows (Mt)
2014 metallurgical coal trade flows (Mt)
Domestic thermal coal margin curve (FOB Newcastle, US$61/t)
Domestic metallurgical coal margin curve (FOB Queensland US$106/t)
Supply-side initiatives: coal quality standards for domestic consumption
Thermal coal demand in coastal China and seaborne imports (Mt)
China coal supply demand balance (Mt)
China's five regions
Thermal coal demand by region (Mt)
Power coal demand by region (Mt)
Non-power coal demand by region (Mt)
Demand: Image 8
Demand: Image 9
Demand: Image 10
Demand: Image 11
Transport cost estimates to move coal from Ordos to QHD for private miners (RMB/t)
Railway capacity expansion from Three-west region and Xinjiang, 2014-2020 (Mt)
Forecast of railed coal to import regions by groups (Mt)