SKU: 54454
Author: Wood Mackenzie

Insight 14 November 2016

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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.

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 the following images and tables:

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