While contracts between Australian producers and Japanese power companies establish export benchmark prices for the commodity, ANZ views that China’s Qinhuangdao port is more influential.
“The global dominance of Chinese coal supply has meant domestic (or Qinhuangdao) coal prices have become the price-setter and lead-indicator for seaborne coal markets – particularly in the past five years,” ANZ said.
Over recent months China has introduced coal import tariffs, including a 6% rate for thermal coal, plus environmentally themed ash and sulphur thermal coal quality restrictions to help address the nation’s glut of the commodity.
“However, the rub for local authorities is that as much as 70% of Chinese coal capacity is still loss making at current prices,” ANZ said.
“This is putting huge stress on Northern provincial growth, heavily reliant of coal mining revenue (royalties).
“We think this is heavily influencing policy changes with the goal of lifting prices and propping up coal mining profitability.
“While it appears to be showing some signs of working, more will be needed to restore a sustainable industry.”
While the bank views that the Chinese government will succeed in lifting thermal coal prices, it could take some time.
“Ultimately, tighter China coal output should mean better coal prices in the second half of 2015,” ANZ said.
