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China's coal policies rescue the thermal coal market

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Report summary

China's coal production restrictions have turned coal markets on their head this year. The Chinese government is trying to strike a balance between restoring its crippled coal sector to some measure of health while maintaining the push to reduce coal sector overcapacity without damaging downstream users such as the electricity utilities. Our analysis suggests a RMB515/tonne price strikes a reasonable balance between the coal and utility sectors and would be viewed as an acceptable price level by the Chinese government. We think this is good news for the seaborne market. We calculate this price level equates to a benchmark Newcastle thermal coal price of US$73/tonne basis 6000 nar. While well below current spot and contract prices at this price level 98% of the seaborne market is cash positive.

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Table of contents

  • Overview
  • Coal industry losses have been significant
  • The Chinese government responded by enforcing capacity cuts
  • What thermal coal price is the government comfortable with?
  • Break-even analysis
  • RMB515/tonne represents a reasonable balance between producers and utilities
  • This price level is good news for the seaborne market

Tables and charts

This report includes 4 images and tables including:

Images

  • China's coal sector costs, revenues and cash flows 2011-2016
  • Regional benchmark break-even prices
  • Chinese domestic to international price arbitrage
  • Seaborne export thermal coal margin curve 2016 at US$73/tonne basis 6000 nar FOB Newcastle

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