NAB’s latest commodity update revealed growth in Chinese imports of thermal coal had weakened considerably in recent months – almost 10% year-on-year lower in the three months to July and less than 1% year-on-year growth over the first seven months of the year.

However, on the bright side, NAB noted that stockpiles at Qinhuangdao – China’s largest coal port – had fallen considerably since the start of August and were now below the average levels recorded over the past four years.

NAB believes a period of destocking may explain recent weakness in import markets.

Reports suggested that China would ban high ash/high sulphur coal from September 1 – in part an effort to address air pollution concerns.

NAB said it could impact demand for lower grade Indonesian exports, which would in turn assist Indonesian government attempts to crack down on illegal mining activity.

This would also work in Australian coal players’ fortunes, as Australian thermal coal is typically high in calorific value (energy content), has moderate ash levels and is low in sulphur and heavy metal contents.

China is also progressively shutting down coal-fired electricity generation and replacing it with natural gas.

The Gaojing thermal power plant in Beijing shut down in July was replaced by two gas-fired generators.

Three more coal plants are slated to close by the end of 2016, according to China Coal Resource.

All in all, while spot prices remain weak, NAB expects limited further downside, reflecting the poor profitability for producers.

Similarly, the increasing scale of idle production capacity should limit significant upside potential.

Contract prices for the next Japanese financial year (commencing April 2015) are unchanged at $US80 ($A88.30) a tonne.