China's coal market has recently been characterized by weakness on both the supply and demand sides. Frequent typhoons and above-average rainfall have weighed on thermal coal demand, while supply from major producing regions has contracted even more noticeably. As a result, mine-mouth coal prices have continued to strengthen and have become the key driver of the current market.
Some market participants have begun to see similarities between the current supply contraction and the 2021 coal rally. In 2021, a rapid recovery in industrial power demand drove a sharp increase in coal consumption, while sluggish domestic production growth and constrained imports further widened the supply-demand gap.
This ultimately sent thermal coal prices sharply higher in the second half of the year, with prices reaching extreme levels in October. However, the current market differs in one important respect: demand remains relatively weak, making the potential upside and duration of the rally much more uncertain.
Supply Continues to Tighten, Pushing Up Mine-Mouth Prices
Coal output has recently been constrained by tighter safety controls, heavy rainfall, and the shutdown of some mines after completing their monthly production targets.
Several areas across Shanxi, Shaanxi and Inner Mongolia have experienced persistent heavy rainfall, forcing some open-pit mines to suspend operations, while some underground mines have also been affected by tighter safety controls. As the end of the month approaches, additional mines are gradually halting production after meeting their targets, further tightening market supply.
The supply contraction has driven a noticeable increase in mine-mouth prices. Although port prices briefly pulled back over the past week, prices at mining areas remained firm and continued to rise. Most mines are currently selling smoothly with inventories at relatively low levels, while vehicle queues remain in some areas.
Frequent Typhoons Weigh on Thermal Coal Demand
Demand has been noticeably weaker than supply. Typhoon activity has remained frequent, with Typhoon Zitan (No. 19) already making landfall in southern China, while Typhoon Shadeer (No. 18) is forecast to make landfall along the Zhejiang-Fujian coast between August 27 and 28. Heavy rainfall is expected to continue over southern China, eastern Jiangnan and parts of northern China over the next three days, with heavy to torrential rain forecast in parts of Shanxi, Shaanxi and Hebei.
Experts from the China Meteorological Administration recently noted that temperatures during this year's sanfu (the hottest period of the summer) period were generally above normal, with more frequent hot days. However, the heat was concentrated mainly in Xinjiang, western Inner Mongolia, the Sichuan Basin and areas from the middle and lower Yangtze River region to Jiangnan. Although extreme heat was more pronounced in northern China, the overall distribution and duration of high temperatures have provided only limited support for thermal coal consumption.
Supply Factors Increasingly Drive the Market
As the peak summer demand season draws to a close, expectations of weaker demand have yet to translate into significant downward pressure on coal prices. As the impact of the latest typhoon gradually subsided, port transportation recovered, and although spot trading remained relatively limited, inquiries from downstream buyers increased again. Port coal prices quickly regained strength, indicating that the market is gradually shifting from demand-driven to supply-driven dynamics.
Of particular note, the latest high-frequency monitoring by CCTD shows that coal deliveries to end-users across 17 inland provinces have recently fallen to historically low levels, down around 6.6% year on year. Thermal coal inventories at end-users in northeastern provinces are also 17%-20% below year-ago levels. Historically, inland inventories typically begin to rebuild in September, with winter stockpiling largely completed around October.
Overall, China's coal market is likely to remain characterized by weak supply and demand in the near term. However, the impact of tightening supply is becoming increasingly pronounced, providing stronger downside support for coal prices. Going forward, market attention will focus on the pace of mine restarts in major producing regions, changes in extreme weather conditions, and the pace of restocking by power plants.
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