Beating the Low Price Condition

PT Borneo Lumbung Energi & Metal Tbk: On the Road to Recovery

PT Borneo Lumbung Energi & Metal Tbk: On the Road to Recovery

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Beating the Low Price Condition
by Sando Sasako
Jakarta, 1 September 2016 20.40

The price of any goods will always low as long as there are no demand or there are too much supply in the market. No demand can mean there may be a demand, but it is weak and may have lower priority than any other products and services that consumers are willing to pay for it. Consumer preferences, expectations, and purchasing power are other perspectives that the sellers should consider.

Let’s take a look at price mechanism below.

A price will fall as:
1. too much supply.
2. there are too many sellers offering the same products.
3. fire sale.
4. supplying companies are in (desperate) need of liquidity (cash-strapped / -starved).
5. too little demand, or lack of demand.

A price will rise as:
1. too little supply.
2. there are not many sellers (offering the same products).
3. short of supply.
4. consumers are in (desperate) need of the goods.
5. too much demand.

To deal with any price levels in the market equilibrium, we are also encouraged to see things with their own perspectives and capabilities of producers and sellers. The low price will discourage producers and sellers to produce and sell goods with a larger volume, but for survival. Lack of incentives surely turns down the appetite to grab a bigger share of the market.

In other words, a shrinking market size makes it less attractive for producers to agressively to pursue their own agenda. Create a product that will provide another potential profit margin. To do so, the product has to have some specialties beyond the competing products. Product creation through innovation will be available as there are sufficient fund to finance some R&D.

It shall prevail as it is up to the market to decide. However, government is another significant player in the market. They will offer some incentives for producers to expand and accelerate the speed to market. At the opposite direction, some government will make some restrictions and constraints for the players to enter the market.

Some agenda deemed necessary to apply are environmental impacts and protection, clean coal technology to reduce the acceleration of global warming that leads to drastic climate change. Some tax and royalties, even prohibition, may also reduce the product supplies to the market. Some hikes on the financial interest may curb the supply as well.

Above all, there’s nothing more challenging to raise the price immediately. Assume the global fears are felt worldwide. Create some intense ambient that will make market supply short, disappear, or won’t continue to exist regularly or periodically. Particularly the product that is essential in day to day life. The price will surely jump to the sky, above any roof policy available.

They used to call it as a threat of war.


20160223 1008 17 Coal’s Collapse Scorches Miners’ Profit Margins
2016-08-15 12:43 PM
http://www.wsj.com/articles/coals-collapse-scorches-miners-profit-margins-1456228748
Coal’s Collapse Scorches Miners’ Profit Margins
Coal prices fall to their lowest levels since early 2007
By Biman Mukherji
Updated Feb. 23, 2016 10:08 a.m. ET

An excavator loads coal onto a truck at a coal port in Lianyungang, eastern China’s Jiangsu province. Photo: Agence France-Presse/Getty Images

HONG KONG-A coal glut has hurt profit margins at some of the world’s largest trading and mining companies, including Noble Group Ltd. and Glencore PLC, as Chinese consumption of the commodity continues to slow.

Coal prices have fallen 9% more since hitting an eight-year low in September, touching their lowest levels since early 2007.

In inflation-adjusted terms, coal prices are back down near average 1990s levels, said Paul Bloxham, HSBC ‘s chief economist for Australia and New Zealand. “Thermal coal prices are now historically low in real terms.”

c. The fallout of that is showing up on company balance sheets.

Noble Group said Tuesday it expects to report a net loss for the fourth quarter and all of 2015 after lowering its long-term forecasts for coal prices, setting the stage for the commodities trader’s worst annual performance since its 1997 Singapore listing.

The thermal-coal market remains oversupplied despite cutbacks of around 70 million metric tons in global exports over the past year, Mr. Bloxham said. He expects some consolidation in Australia’s thermal-coal industry over time.

The outlook worsened after China’s government pledged last year to cut pollution, introducing a measure that placed restrictions on certain types of highly polluting coal. Slowing power demand in the country has exacerbated a drop in coal-fired electricity generation, said Georgina Hayden, a senior energy and infrastructure analyst at BMI Research.

“We maintain our view that coal-fired power generation [in China] contracted by 3.05% over 2015, but are now forecasting coal to contract further over 2016 and 2017, by 2.2% and 2.1%, respectively,” she said.

Newcastle coal, the main pricing benchmark in Asia, is expected to trade in a range of $40 to $60 a ton through 2020, compared with $140 a ton in 2011 and $78 a ton from 2012 to 2015, BMI Research said.

Coal imports by China, which accounts for around half the global demand, dropped nearly 30% in 2015 from the previous year, according to Platts. “Oversupply is expected to persist this year amid limited supply cuts seen at major producing regions like Indonesia and Australia,” the price-reporting service said.

Indonesia, the world’s largest exporter of coal, and its producers have been struggling since China clamped down on certain grades of coal. But it isn’t easy to adjust.
‘Although India is a big market, there is no ‘new China’ to shore up demand.’
-Marius Toime, a legal partner at Berwin Leighton Paisner

“Cutting production is not a simple exercise for the Indonesian coal miners. The government may try to keep exports high to support royalty levels, which have taken a big hit,” said Marius Toime, a legal partner at Berwin Leighton Paisner who specializes in the resources sector.

“China’s demand for coal continues to wane, in line with slowing growth and climate commitments to the U.N. Although India is a big market, there is no “new China to shore up demand,” he said.

China’s declining consumption of coal is also affecting domestic companies.
A worker clears a conveyor belt used to transport coal in China’s northern Shanxi province in November. ENLARGE
A worker clears a conveyor belt used to transport coal in China’s northern Shanxi province in November. Photo: Greg Baker/Agence France-Presse/Getty Images

Twenty out of 28 coal companies listed on China’s Shanghai and Shenzhen stock exchanges that released results recently have reported losses, according to a Fitch Ratings report, with 10 of them reporting losses of more than 10 billion yuan ($1.5 billion) last year, compared with 3 billion yuan in 2014.

The limited success of the Chinese government’s supply-side reform to reduce overcapacity is partly to blame for the lingering oversupply problem, the ratings company said.

“Massive funding and coordination will be required to settle the employment and social-stability issues arising from mine closures. Coupled with weak demand arising from the coal-fired power-generation sector and heavy industries, we believe a price recovery is unlikely in 2016,” Fitch said.

One positive for coal-mining companies has been the drop in crude-oil prices to multiyear lows, lowering operation costs. Oil prices have plunged from more than $100 a barrel in mid-2014 to about $30 a barrel today.

“Falling crude prices are a net positive for miners by reducing operational costs. Specifically, the cost of fuels for operating machinery and mobile power units,’ said John Davies, London-based head of commodities research at BMI Research. “However, it is not a game-changer and not enough to offset the negative impact of lower coal prices on their profitability over the past 18 months.”

Write to Biman Mukherji at biman.mukherji@wsj.com


Monday, 15 August 2016
20160531 1658 16 China’s Coal-Plant Binge Deepens Overcapacity Woes
2016-08-15 12:31 PM
http://www.wsj.com/articles/chinas-coal-plant-binge-deepens-overcapacity-woes-1464692337
China’s Coal-Plant Binge Deepens Overcapacity Woes
By Brian Spegele, May 31, 2016 6:58 a.m. ET

Chinese companies are binge-building thermal power plants, compounding an oversupply of power. Photo: Getty Images
China is building power plants it doesn’t need amid low coal prices and local efforts to create jobs

SHOUGUANG, China-In a whir of hammering and welding, construction crews in the industrial town of Shouguang put finishing touches on a new coal power plant that testifies to a building binge by Chinese companies-one that is compounding an oversupply of power.

For companies and local officials eager to prop up growth with new jobs, the availability of low-cost financing is combining with coal prices that are half the level of five years ago to make power projects attractive.

Tens of billions of dollars will be spent over the next two years. Investment in thermal power projects jumped 20% last year even as China’s power demand fell.

Workers at the new coal plant in Shouguang, 200 miles southeast of Beijing, say they’ve been at it for two and half years. The project could have been ready earlier, says one, but the electricity “wasn’t urgently needed.”

Power Siurge

While Chinese leaders are eager to recharge flagging economic growth, the pace of building and investment has started to worry them, frustrating key goals to restructure the economy and clean up the nation’s polluted skies.

This raises the question as to whether state companies’ investments are “being used to drive short term GDP numbers with no regard for market demand or investment returns,” said Lauri Myllyvirta, a coal campaigner at the environmental group Greenpeace.

Beijing has promised to reduce overcapacity in the coal sector and other industries sucking up investment that could be better spent elsewhere. It has set aside 100 billion yuan to resettle laid-off workers, some 1.8 million of them from the coal and steel sectors.

Cutting coal demand is also a necessary step for China to meet its pledge to begin reducing its carbon emissions by about 2030, if not earlier.

The National Development and Reform Commission, China’s top economic planning agency, has banned approvals for new coal-fired power projects in oversupplied regions. While the move may help curb planned projects, many already under construction appear to be pushing ahead.

The commission and the National Energy Administration didn’t respond to requests for comment.

China already has more power-generating capacity than any other country. It is projected to add nearly 200 gigawatts worth of new thermal power capacity between 2015 and 2017, according to an analysis by Fitch Ratings Inc. That is more than the entire electrical capacity of Canada. While some capacity would be for natural gas, most will be coal-powered.

Unmatched Growth

Building unneeded thermal power plants underscores the difficulties President Xi Jinping and other leaders face in effecting their pledge to downshift the economy to a more sustainable track. State-led investment is still a mainstay to generate growth, and, industry analysts say, local governments are valuing the short-term over longer term financial health.

“Local governments are focused on regional jobs,” said Ranping Song, a China energy expert at the Washington-based World Resources Institute. “There’s no question” power overcapacity stands to get worse in the coming years.

The mismatch between electricity demand and investment is evident in Shandong, where the Shouguang plant is forging ahead. The province is among those where the NDRC, the government agency, banned new project approvals.

Operational coal-fired plants already dot Shandong’s industrialized coastline. Heavy emissions from chemical plants and oil refineries cause a thick pall of smog. As more power-generating capacity comes online, utilization rates at power plants are falling.

The Shenhua Guohua power plant-as the Shouguang plant is known and which is controlled by Hong Kong-listed energy giant China Shenhua Energy Co. -has created thousands of jobs, say company officials and workers.

The consortium that owns the plant, which includes investment from companies backed by the local government, declined a request for an interview. City and provincial economic planning officials didn’t respond for comment. A Shenhua Guohua official confirmed the project will enter service in June.

Authorities in recent years justified new power plants in Shouguang and elsewhere by saying they would replace older, less efficient ones. But capacity growth is outpacing the decommissioning of older units.
Construction crews put final touches on a new coal-fired power plant in Shouguang, Shandong province, amid growing concerns about overcapacity in China’s electricity sector. ENLARGE
Construction crews put final touches on a new coal-fired power plant in Shouguang, Shandong province, amid growing concerns about overcapacity in China’s electricity sector. Photo: Brian Spegele

An analysis by Greenpeace’s Mr. Myllyvirta estimates that by 2020, Shandong could have over 30 gigawatts of excess power capacity.

One force behind the build out is plunging coal prices. Prices for one coal type at the northern port of Qinhuangdao plummeted to less than $60 per metric ton this month from around $130 per metric ton in 2011.

Low fuel prices help keep projects profitable, given that state-set electricity prices haven’t been adjusted downward as much as the price-drop for coal. Meanwhile, benchmark commercial borrowing rates for loans of five years or longer fell to 4.9% by the end of 2015, compared with 7.05% in early 2012.

Risk lies in whether Beijing pushes ahead with reform plans that include letting electricity consumers such as factories negotiate power supply agreements with producers. Added competition could bring down electricity tariffs, pressuring operators.

Even as they compete, thermal power plants have to contend with the cleaner sources of energy coming online: nuclear plants along China’s coast, wind farms across the northern plains and hydropower in the south.

Kiah Wei Giam, an analyst at energy consultancy Wood Mackenzie forecasts a drop in thermal coal demand of 50-100 million metric tons annually for the next few years. “When nuclear comes online and hydro comes online you can’t stop them from displacing coal.”

  • Kersten Zhang contributed to this article.

Write to Brian Spegele at brian.spegele@wsj.com


Power Down


Monday, 15 August 2016
20160602 1538 14 As Coal Prices Fall, Miners Cut Output
2016-08-15 12:23 PM
http://www.wsj.com/articles/as-coal-prices-fall-miners-cut-output-1433269071
As Coal Prices Fall, Miners Cut Output
By Rhiannon Hoyle, June 2, 2015 3:38 p.m. ET

China imports less for steelmaking, and India has yet to fill the gap
China is importing less coking coal. Above, a mine in Russia. Photo: Andrey Rudakov/Bloomberg News

SYDNEY-China’s appetite for coal used in steelmaking is faltering, deepening a market downturn miners say is the worst in recent memory.

The price of steelmaking coal shipped from Australia, the world’s biggest exporter, has fallen 23% this year to roughly $86 a metric ton, its lowest level in nearly a decade. The slide extends a decline begun in 2011, during which the fuel’s value has slumped by around three-quarters.

The prolonged dive is now compelling miners to move beyond cutting costs, their first line of defense in hard times. Major suppliers Glencore PLC and Canada’s Teck Resources Ltd. are reducing production, blaming the chronic global oversupply of coal.

But analysts caution that prices will recover only if more cuts are made. The consultancy Wood Mackenzie doesn’t expect the oversupply of steelmaking coal, or coking coal, to clear up until about 2022.

China, whose breakneck economic growth has been the engine for most global commodity markets, won’t need as much steelmaking coal in future, analysts now project. That leaves miners who rushed to open new pits in the boom years to struggle.

Coal Hole

Chinese sectors such as heavy industry and real estate are growing less quickly or slowing, causing a moderation in steel demand. China’s imports of coking coal plunged more than 40% in April from a year earlier, to 3.75 million tons. Over the first four months of 2015, imports were down by roughly a quarter from a year earlier, according to customs data.

The world’s No. 2 economy is now tilting toward growth driven by consumer-led sectors. In turn, the country’s appetite for commodities is evolving. Metals used to make electronic products are becoming relatively more popular. Copper is in, while coal is out.

“Driving much of this slowdown [in coal] is China’s transition,” said Citigroup Inc. analyst Ivan Szpakowski. “It is a transition we think there is no going back from.”

The coal-market downturn has even outpaced the collapse in prices of iron ore, the other key steelmaking ingredient. China is less reliant on imported coal than on iron ore from overseas, so as demand ebbs, it can meet more of its needs domestically.

Coal Piles

For sure, rising Indian demand may help compensate eventually. The country’s large coal reserves contain little quality coking coal. Citigroup forecasts India’s imports will overtake China’s net imports by the end of the decade, moving past purchases by Japan-another major buyer-shortly after.

But in the short term, the gloomy price environment is changing the coal industry’s economics.

At current spot prices, more than half of the coal produced is being dug up at a loss, Citigroup estimates. Many miners do lock in sales each quarter at fixed prices-exporters are selling at around $109.50 a ton for the current quarter-but buyers are likely to drive a harder bargain for the rest of the year.

“The third quarter will be tough, and the fourth quarter even tougher,” said Wood Mackenzie coal-market analyst Kiah Wei Giam.

Even giants such as Australia’s BHP Billiton Ltd. , which is the world’s No. 1 coking-coal exporter, in partnership with Japan’s Mitsubishi, are under pressure, at a time when shareholders are demanding greater returns. While BHP’s coal division, which also produces thermal coal, generates around 15% of the company’s revenue, it contributed only 2% of its operating profit in the six months through December.

U.S. producers have been the hardest hit. A stronger greenback means U.S. shipments struggle to compete against cargoes from elsewhere. China is also taking considerably less coal from Canada and Russia.

Australia, too, has seen the amount of coal shipped to China decline, although local miners have succeeded in driving down operating costs, limiting the damage. Producers have been reluctant to reduce output due to so-called take-or-pay contracts, which have locked them into paying for access to ports even if they don’t have enough material to ship.

“Coal producers have so far been slow to make closure decisions,” said Stewart Butel, managing director of midsize coal producer Wesfarmers Resources, a unit of Australian conglomerate Wesfarmers Ltd. “The [coking] coal market remains in oversupply.”

Attitudes may now be changing.

Glencore, whose chief executive, Ivan Glasenberg, has long been critical of miners failing to cut excess production, said it plans to pare back output at its Collinsville open pit in Queensland state by as much as 40% and eliminate up to a quarter of the mine’s workforce.

“The situation at Collinsville reflects the challenges being faced by all Australian coal mines in one of the most difficult markets in the industry’s recent history,” the company said in a statement.

Smaller producers are feeling the squeeze elsewhere.

Vancouver-based Teck Resources slashed its dividend after reporting lower-than-expected profit in April. Last week, Teck said it would briefly idle six Canadian coal operations, reducing its planned third-quarter output by 22%.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com


Monday, 15 August 2016
20160609 1422 06 Unloved coal rides commodities rebound
2016-08-15 11:42 AM
http://www.ft.com/cms/s/0/2463e5fc-2e4d-11e6-a18d-a96ab29e3c95.html#axzz4HNAtrPA0
Unloved coal rides commodities rebound
Neil Hume, Commodities Editor
June 9, 2016 4:22 pm

A rising tide lifts all boats – even it seems seaborne thermal coal, possibly the least loved major commodity.

Raw materials are enjoying their best start to a year since 2008 aided by a weaker US dollar and better supply and demand fundamentals. Iron ore, oil, gold, soybeans and zinc have led the advance but other less favoured commodities have also seen gains, including coal.

All of the major thermal coal benchmarks have pushed above $50 a tonne in recent weeks. The price of coal shipped from the Australian port of Newcastle – marker for the Asian market – has risen almost 5 per cent over the past month and headed close to $54 a tonne this week, according to Argus, a price reporting agency. However, it remains well below the 2008 peak of more than $180 a tonne.

The rally has surprised analysts who had been expecting another tough year for seaborne, or exported, thermal coal, which is used in power stations to generate electricity and is a major source of income for mining companies such as Glencore .

Prices fell around 20 per cent last year as global consumption of coal plunged by the biggest amount since at least 1980, according to BP’s latest review of world energy, hit by weaker Chinese demand and switching to gas.

While the recent recovery in prices owes much to a weaker dollar and rising oil prices, which has eased some of the deflationary pressures that have plagued the industry, other factors have also been at work. These include output cuts from producers in Australian and Indonesia as well as a significant fall in domestic supplies in China.

“Sentiment in the coal market is better than it has been in years,” said analysts at Citi in a report this week.

After a major accident at Datong Coal, a major Chinese producer, in mid-March local authorities ordered the closure of large mines in Shanxi, the country’s third largest thermal coal producing province.

At the same time, the government in Beijing has told producers to cut capacity by 16 per cent and reduce statutory working days for coal miners to 276 days from 330 days per year.

“We expect the enforcement will be strict,” said Citi, which forecasts Chinese raw coal production to fall 9 per cent this year, more than compensating for an expected 3.4 per cent decline in demand.

All of this has lifted domestic prices in China and made imported coal more attractive. Data released earlier this week showed Chinese coal imports hit 19m tonnes in May, up 34 per cent from the same month a year ago.

On top of this there also been significant disruption to Indonesian shipments because of heavy rains.

“Trading sources report that vessels were delayed in loading for an average of 10 days to 2 weeks, catching Chinese traders with power plant contracts short and scrambling for spot volume,” said Macquarie analyst Stefan Ljubisavljevic in a note to clients this week. Port stocks at northern Chinese ports are currently at a five-year low of 13m tonnes.

In spite of the recent rebound, most analysts remain bearish on thermal coal, saying the long-term outlook remains bleak because of environmental concerns and the growth of the liquefied natural gas market.

“Global demand continues to fall, production discipline will be tough to enforce if prices continue to rise, the Chinese government is unlikely to tolerate rising imports?.?.?.?and there’s still that glut of LNG on the horizon,” said Mr Ljubisavljevic.

He added: “Once significant LNG volumes enter the market, we are likely to see an aggressive market share battle between fossil fuels with negative price implications.”


Monday, 15 August 2016
20160621 0618 15 BHP Sticks With Coal in Hard Times
2016-08-15 12:29 PM
http://www.wsj.com/articles/bhp-sticks-with-coal-in-hard-times-1466504386
BHP Sticks With Coal in Hard Times
By Rhiannon Hoyle, June 21, 2016 6:19 a.m. ET

Company sounds a bullish note on expected demand

Coal prices plunged in recent years amid a global glut. Shown, coal being stockpiled at a mine near the town of Moranbah, Australia, in 2012. Photo: Reuters

SYDNEY-Amid the misery in a market strained by bankruptcies, mine closures and mass worker layoffs, coal still has at least one major supporter.

BHP Billiton Ltd. , the world’s biggest mining company, on Tuesday sounded a bullish note on future demand and its role as a major exporter. In an investor briefing, it said the world’s appetite for coking coal, used in steelmaking, and thermal coal, which is burned to generate electricity, will rise as developing economies demand more steel and energy.

“We expect that thermal coal will remain front and center in Asia’s energy portfolio into the foreseeable future because it is the cheapest and most readily available source for power generation,” said Mike Henry, BHP’s head of Australian mining.
— ADVERTISEMENT —

The mining company said thermal-coal demand will increase 10% to 15% from 2015 levels by the mid-2020s, aided by robust buying in India and Southeast Asia, even as the fuel accounts for a declining share of global electricity generation. It expects demand for coking coal to be robust as well, as it predicts that steel output in China won’t peak until the middle of the next decade.

This isn’t a universally accepted view, even within the mining industry.

Coal markets have been in decline since 2011 thanks to a global glut caused by supplies from new mines and expansions that were planned when prices were booming. Appetite from China, the main engine for coal demand in the 21st century, has meantime ebbed as officials there work to curb industrial overcapacity and clean up the country’s polluted skies.

Many miners including Glencore PLC, the world’s No. 1 thermal-coal shipper, have cut coal output or closed unprofitable mines. Others including Peabody Energy Corp., the U.S.’s biggest coal miner, have filed for bankruptcy.

Meantime, analysts project that global oversupply will take several years to clear.

Over the past five years, the value of thermal and coking coals has declined about 60% and 70%, respectively. Their outlook has been muddied by evolving climate-change policies and doubts about how quickly China will pursue its goals to restructure the economy and reduce air pollution.

“There is a considerable degree of uncertainty about how global energy demand will evolve, and the further you look into the future, the greater that uncertainty becomes,” said Alexandra Heath, the Reserve Bank of Australia’s head of economic analysis, in a speech on Tuesday. “We do know the growth in energy demand over the past couple of decades is unlikely to be sustained, partly because the drivers of that growth are likely to diminish and partly because energy efficiency increases over time.”

Ms. Heath said coal’s low cost and reliability should help support the market, but she said “demand for coal is not likely to increase significantly from current levels.”

Environmental policies world-wide are favoring lower-emission fuels, such as natural gas and renewables, she said. In China, the country’s top economic planning agency banned approvals for new coal-fired plants in some provinces and Beijing has pledged to begin reducing its carbon emissions by 2030.

For its part, BHP-a major supplier of thermal coal and the world’s No. 1 exporter of coking coal-signaled it would stick by the beleaguered business and raise output by working the mines it runs harder. It will also consider buying rival mines, or spending cash on new projects “when the time is right,” Mr. Henry said.

He declined to comment on whether BHP is pursuing Anglo American PLC’s Australian coking coal operations, which the U.K.-listed miner recently put up for sale. BHP would be “the natural owner” of several of the mines, according to brokerage CLSA Ltd.

BHP said it is optimistic about the outlook for coking coal due largely to rising demand in India, where companies are investing billions of dollars in new steel mills. A government official last year estimated that steel production capacity there could triple by 2025.

“The developing world needs steel, steel needs coking coal,” Mr. Henry said. “Short-run dynamics belie this long-term positive outlook.”

But BHP’s competitors have been more downbeat. Earlier this month, Glencore said it would close its Tahmoor coking coal operation in eastern Australia, saying it is no longer worth mining given continued price weakness.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com


Monday, 15 August 2016
20160711 1750 02 Seaborne thermal coal price rises to highest level in 10 months
2016-08-15 11:25 AM
http://www.ft.com/cms/s/0/8a140564-477d-11e6-b387-64ab0a67014c.html#axzz4HMvqCnhh
Seaborne thermal coal price rises to highest level in 10 months
Neil Hume, Commodities Editor
July 11, 2016 5:50 pm

The price of seaborne thermal coal for the vast Asian market has risen to its highest level in more than 10 months, boosted by a flurry of purchases from Chinese buyers eager to secure supplies because of a government-led clampdown on surplus capacity.

Thermal coal is used in power stations to generate electricity and is a major source of income for mining companies such as Glencore, the world’s biggest exporter. Tagged the “least loved major commodity” by many analysts, it has out been favour for years because of tumbling prices and an environmental backlash.

Sentiment has improved this year as prices have rebounded because of a weaker US dollar and the near doubling of the oil price, which has eased some of the deflationary pressures weighing on the coal industry. Oil is also important because it helps set the price of natural gas, which competes with thermal coal across Asia in power generation.

“The least loved part of the energy complex is looking in better shape than it has for several years,” said analysts at Citi in a report.

From a low of $49 a tonne in January, high-grade Australian thermal coal – the benchmark for the Asia market and the huge Chinese market – has gained 20 per cent to more than $59 a tonne, according to Argus, a price reporting agency.

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In the past week, Chinese buyers have started to snap up cargoes of thermal coal in the spot market, fearing a move to rationalise domestic supplies will prove successful. The government in Beijing recently ordered coal mines to cut capacity by 16 per cent and operate for 276 days annually versus 330 days previously.

At the same time, shipments from Indonesia have been disrupted and utility companies in South Korea and Taiwan have also started seeking cargoes of high-grade Australian thermal coal.

“There are so many cuts coming through domestically that China’s consumers will probably need to engage the seaborne [or import] market,” said Tom Price, analyst at Morgan Stanley.

The bank expects China to import around 145m tonnes of coal this year, equivalent to 17 per cent of the global seaborne trade.

Analysts are divided on the outlook for prices after the recent rebound. Some believe prices could push upwards if China strictly enforces its new rules and the la Niña weather phenomenon leads to increased rainfall and affects Australian and Indonesian output. In such a scenario Citi thinks prices could rise to as much as $90 a tonne.

However, Morgan Stanley reckons prices are unlikely to push beyond $60 a tonne because it would lead to higher shipments from Colombia, another major producer, and encourage miners to restart mothballed projects.

On top of that, Mr Price said China’s electricity use was “flat” and “uninteresting” and it was only raw materials used in steel production such as coking coal and iron ore that were seeing increased demand.

This is widely perceived to be the result of a government-engineered credit surge earlier this year that led to a pick-up in construction activity and ultimately consumption of steel.

On this topic
China province to roll over $60bn coal loans http://www.ft.com/cms/s/0/8b244b36-5d39-11e6-a72a-bd4bf1198c63.html
Analysis An ugly year to be a coal bear http://www.ft.com/cms/s/0/5791c4e2-500f-11e6-8172-e39ecd3b86fc.html
Analysis EDF looks to future without coal trading http://www.ft.com/cms/s/0/f78f7e14-49af-11e6-b387-64ab0a67014c.html
Coal sector tries to counter green lobby http://www.ft.com/cms/s/0/bb0513fe-8f9d-11e5-a549-b89a1dfede9b.html

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Glencore bumps up copper forecast http://www.ft.com/cms/s/0/0a821af0-6066-11e6-ae3f-77baadeb1c93.html
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Monday, 15 August 2016
20160714 0910 01 Coal prices bounce back this year, but not for good
2016-08-15 11:24 AM
http://www.reuters.com/article/us-coal-prices-idUSKCN0ZU1JC
Coal prices bounce back this year, but not for good
By Nina Chestney | LONDON
Thu Jul 14, 2016 9:10am EDT

A rally in thermal coal prices over the past few months, after years of decline, should continue into next year but a cloud still hangs over the market in the form of weakening global demand due to more clean energy and increased energy efficiency.

All major benchmarks for thermal coal have risen above $60 a ton in the past few weeks, an increase of around 50 percent since record lows earlier this year, due to output cuts, supply disruptions, and increases in demand in some parts of the world.

Many analysts expect prices to keep gaining for the rest of this year and into some of next year, but they will then likely go back into decline because the overall trend is one of global demand falling and production cuts could be difficult to enforce when prices are on their way up.

The coal market has been oversupplied for years, which dragged prices down by around 80 percent between 2008 and early this year, forcing producers to cut back investment into new capacity and close unprofitable mines.

China, the world’s biggest coal producer, is restricting output to reduce a supply glut, lowering output by 280 million tonnes this year as part of a wider plan to close 500 million tonnes of production in three to five years.

Analysts at Citigroup expect Australia’s thermal coal, the Asian benchmark, to rise further as the Pacific Basin market tightens due to Chinese output cuts and weak Indonesian exports. Falling European demand may also divert more coal to Asia.

“Adding fuel to the fire would be if rainfall due to La Niña was larger than expected, affecting production in Australia and Indonesia, quickly tightening the market,” they said.

“Prices could even surge by 25 to 50 percent, or up to $90/ton based on current prices.”

In late 2010/early 2011, a strong La Niña drenched coal production areas in Australia and Indonesia, disrupting output and driving up prices to around $145/ton from $90/ton.

CLOUD OVER COAL

Demand for coal from India, Bangladesh, South Africa, Russia, South Korea, Indonesia and Australia is forecast to rise into next year as coal remains a cheaper alternative for producing energy but U.S. and European demand in particular will wane, mainly due to cheaper gas.

“We remain bearish on the thermal coal market … Demand has deteriorated further, led by the seasonal decline of our EU Coal Burn Index. The profitability of coal-burning power stations in Europe (rather than gas), is now negative,” said Georgi Slavov, global head of energy, iron ore and shipping research at Marex Spectron.

In Europe, demand is falling due to environmental regulations. In EU some countries, such as Britain, cheaper gas is squeezing coal out of the market. This is expected to continue and could drag European coal prices down around $40-50 a ton, analysts said.

“In a counter-intuitive way, the market is showing persistent tightness whereas coal demand is falling in most parts of the world,” said Guillaume Perret, director of coal, iron ore, steel and freight consultancy Perret Associates.

“We think the current rally is overshooting, in a similar way as prices overshot on the way down in January 2016. It is not fueled by a genuine increase in demand but rather by a short- to medium-term delay for spare supply capacity to adjust to demand,” he added.

(Editing by David Evans)


Monday, 15 August 2016
20160714 1549 18 CSX Results Hurt by Sagging Demand for Coal — WSJ
2016-08-15 12:47 PM
http://www.nasdaq.com/article/csx-results-hurt-by-sagging-demand-for-coal–wsj-20160714-00049
CSX Results Hurt by Sagging Demand for Coal — WSJ
By Ezequiel Minaya
2016-07-14 02:49:00-05:00

July 14, 2016, 02:49:00 AM EDT
By Dow Jones Business News
Read more: http://www.nasdaq.com/article/csx-results-hurt-by-sagging-demand-for-coal–wsj-20160714-00049#ixzz4HNSHflY1

CSX Corp. said Wednesday that revenue for its second quarter fell 12% as falling coal shipments — a key business for freight lines — continued to pressure the railroad operator.

Shares of CSX, though, rose 4.4% to $28.21 on Wednesday as the company’s earnings topped expectations. The stock is up 9% for the year.

A spokeswoman for CSX said in an email message that the posting, which went up on the social media site at about 2 p.m. ET, was removed “immediately.” She didn’t specify what the message said but added that CSX officials moved ahead with an early release of their earnings report to provide “investors the correct information as quickly as possible.”

CSX has struggled over the past two years as sagging demand for coal, amid plunging energy prices and a strong U.S. dollar, has cut into rail traffic.

For the latest quarter, coal volume for CSX was down 30%. The company has said it expects the market to remain challenging, with coal volumes down about 25% for the year.

“The environment that we see is really typified by low natural-gas prices, low commodity prices and a strong U.S. dollar, and we expect those to continue even though we had seen some small moderation in those in the past few weeks,” CSX Chief Financial Officer Frank Lonegro said in May at an industry conference, according to a FactSet transcript.

On Wednesday, CSX said it expects 2016 full-year earnings per share to decline. The company, though, didn’t provide a specific forecast.

CSX has met or exceeded earnings expectations over the past three quarters, having responded to sector turmoil with efficiency moves that included layoffs and the mothballing of trains.

For the quarter ended June 24, CSX reported a profit of $445 million, or 47 cents a share, down from a year-ago profit of $553 million, or 56 cents a share.

Revenue fell 12% to $2.7 billion.

Analysts surveyed by Thomson Reuters expected earnings to decline to 44 cents a share on revenue of $2.7 billion.

According to the Association of American Railroads, U.S. carloads through the past six months fell 12.5% compared with the same period last year, with coal carloads plunging 30.2%. Petroleum and associated products also dragged on the traffic tally, falling 21.6%.

Hopes that intermodal traffic — the hauling of shipping containers — would help offset the drop-off in other categories, haven’t quite been met. Total intermodal units fell a modest 2.7%.

Write to Ezequiel Minaya at ezequiel.minaya@wsj.com

(END) Dow Jones Newswires
07-14-160249ET
Copyright (c) 2016 Dow Jones & Company, Inc.


Monday, 15 August 2016
20160714 1719 12 China reaffirms plan to cut steel and coal production
2016-08-15 12:09 PM
http://www.scmp.com/news/china/economy/article/1989796/china-reaffirms-plan-cut-steel-and-coal-production
China reaffirms plan to cut steel and coal production
Maggie Zhang
PUBLISHED : Thursday, 14 July, 2016, 5:19pm
UPDATED : Thursday, 14 July, 2016, 11:08pm

China will use all means to meet its goal to cut steel and coal capacity this year despite local reluctance to reduce output as prices rise, China’s top economic planner said on Thursday.

“As state leaders have stressed, we must fulfil the plan to cut overcapacity of steel and coal this year,” said Zhao Chenxin, a National Development and Reform Commission spokesman, in Beijing. “The pledge made by local governments will be checked at year end and those who fail to accomplish their targets will be held accountable.”

EU and Beijing to mount joint watch on Chinese steel cutbacks

China planned to trim its steel production capacity by 45 million tonnes this year and cut coal output capacity by 280 million tonnes, Xu Shaoshi, head of the top economic planner said on June 26.

So far, the plan to stem overcapacity is starting to bear fruit with improving operations of coal and steel mills, expectations of better performance and increased bank loan payments, Zhao said.

In the first five months of this year, China’s crude steel output dipped 1.4 per cent from the same period a year earlier and its coal production dropped 8.4 per cent.

As state leaders have stressed, we must fulfil the plan to cut overcapacity of steel and coal this year
Zhao Chenxin, National Development and Reform Commission spokesman

According to data from the China Iron and Steel Association, its member mills, which are the industry’s major players, reported combined profits of 8.74 billion yuan (HK$10.49 billion) in the first five months, up 738 per cent from a year earlier. About 28.28 per cent of member mills reported losses, down 13.13 percentage points from a year earlier. The mills started to report profits for three straight months since from March, the association said.

In comparison, in 2015, the mills reported a combined loss of 64.53 billion yuan, with 50.5 per cent of them reporting losses.

For China’s coal and steel cities, drive to cut overcapacity casts pall over future

However, the improving market conditions have also deterred some manufacturers from further trimming capacity, Zhao said.

“All relevant parties should keep a clear head to firmly press ahead with the plan to reduce excess capacity,” he said.

Premier Li Keqiang agreed with European Commission President Jean-Claude Juncker on Wednesday that China and the EU would set up a team to monitor the steel trade and track Beijing’s efforts to address overcapacity, which Juncker said is clearly tied to the Brussels deliberation on granting China market economy status.

Chinese steelmakers report huge losses amid plunging prices and overcapacity

Vice-commerce minister Wang Shouwen said on Sunday that China reduced steel capacity by 90 million tonnes in the five years to the end of 2015 and promised to cut another 1 trillion to 1.5 trillion tonnes in the five years to the end of 2020.

The nation’s two top state-owned mills, Baosteel Group and Wuhan Iron and Steel (Group), plan to merge as the industry consolidates.

China will announce its second quarter GDP data on Friday, together with indicators on investment, industrial output and retail sales. China’s economy grew 6.7 per cent in the first quarter.

This article appeared in the South China Morning Post print edition as:
China in all-out drive to cut excess steel and coal output


Monday, 15 August 2016
20160725 04 An ugly year to be a coal bear
2016-08-15 11:34 AM

An ugly year to be a coal bear

An ugly year to be a coal bear
On July 25, 2016

Beijing’s decision to ease production has sent prices higher and wrongfooted traders

If the first rule of macro trading is “don’t fight the Fed” then the first rule of raw materials must be “don’t fight Beijing”.

It is a truth coal traders are discovering after China upended the market with plans to impose a five-day week working week for domestic mines in a bid to cut overcapacity.

Since the policy was announced in March, the price of thermal coal has risen by 20 per cent as Chinese traders have been forced to chase after cargoes in the seaborne market or to draw down stocks.

The rally has wrongfooted many market participants who were betting on another year of falling prices for thermal coal, which is used to generate electricity in power stations and is a source of profits for global mining houses likes Glencore and Rio Tinto.

At least one big participant, traders say, has been caught on the wrong side of a major position that was designed to protect the company against falling prices. Beijing’s directive has also turned on its head the widely held view that Chinese imports of thermal coal would dwindle from the 140m tonnes purchased last year.

“Thermal coal bears, among which we were one of the biggest, have been reminded this year that it is not wise to fight the Chinese government,” says Colin Hamilton, head of commodity research at Macquarie. “As long as China remains a meaningful thermal coal importer, it will act as a price setter.”

For years China has been trying to put its bloated coal industry on a more stable footing, but latest reforms are some of the first to have an immediate impact on the broader market. Mines normally operate 24 hours a day and seven days a week.

The benchmark price for Asia – thermal coal shipped from the Australian port of Newcastle – is up by more than a quarter since its lows in January and is now trading above $ 61 a tonne. Other coal markers have seen similar gains but remain well their 2008 peaks of nearly $ 200 a tonne.

Analysts estimate domestic production in China was down per cent 10 to 15 per cent in May from a year ago, while the latest official data point toward rising imports.

“Before China announced its ‘de-capacity’ efforts, we thought seaborne imports would fall to about 110m tonnes [this year]. But now, we think they’ll hold at 140m tonnes or maybe even get a bit higher,” says Andy Roberts, head of thermal coal research at Wood Mackenzie, a consultancy.

Analysts say the decline in domestic production has coincided with increased demand in China, as power consumption picks up over the hot summer months. Morgan Stanley reckons coal-fired power production rose nearly 5 per cent month-on-month in June and will rise further through July and August.

“The combination of rising demand growth and impaired supply has prompted an inventory drawdown,” says Morgan Stanley analyst Tom Price.

Globally, thermal coal production has been declining for more than a year as the collapse in prices has forced miners to scrap new projects and expansions plans. More recently heavy rainfall has hit supplies from Indonesia, the world’s biggest exporter, intensifying the impact of the policy changes in China.

But traders who handle millions of tonnes of coal a year say the recovery in prices cannot be solely explained by decisions taken China. A weaker US dollar and the oil price, which has almost doubled from its January low, have also contributed. Another influence has been the derivatives market.

Traders say a large coal producer had been selling call options to banks in the over-the-counter market. These trades, known as covered positions, were profitable as long as price kept declining. But that is no longer true.

A seller of a call option pockets a premium upfront but is obliged to deliver an asset at a specified price or time if it exercised by the holder.

Faced with growing losses on the call options as coal prices rallied through June, traders say the producer has been forced to buy futures contracts to hedge its position. But the volume of futures it has been trying to buy has been so big that it has pushed up prices.

“The market didn’t turn because of this position but it is responsible for the ferocity of the move upwards,” says one coal trading executive. “It would have rallied much less quickly without it.”

It is not clear how many futures contracts the producer needs to buy but the view among market participants is that the call options expire in September and December. That is one reason why traders believe prices might have peaked for 2016. They also fears private sector miners in China, attracted by higher margins, might ignore the government rules.

“We do not expect this China induced tightness to hold beyond the next couple of months, but it is tough to be sure,” says Mr Hamilton.

Others are not so sure. Analysts at Citigroup reckon prices could surge to $ 90 a tonne if the La Niña weather phenomenon that is expected to develop later brings heavy rain to Australia and Indonesia.

Copyright The Financial Times Limited 2016.


Monday, 15 August 2016
20160725 1558 07 Thermal coal bears gripped by Chinese capacity squeeze
2016-08-15 11:44 AM
http://www.ft.com/cms/s/0/5791c4e2-500f-11e6-8172-e39ecd3b86fc.html#axzz4HNAlmcau
Thermal coal bears gripped by Chinese capacity squeeze
Neil Hume, Commodities Editor
Last updated: July 25, 2016 3:58 pm

Beijing’s decision to ease production has sent prices higher and wrongfooted traders

If the first rule of macro trading is “don’t fight the Fed” then the first rule of raw materials must be “don’t fight Beijing”.

It is a truth coal traders are discovering after China upended the market with plans to impose a five-day week working week for domestic mines in a bid to cut overcapacity.

Since the policy was announced in March, the price of thermal coalhas risen by 20 per cent as Chinese traders have been forced to chase after cargoes in the seaborne market or to draw down stocks.

The rally has wrongfooted many market participants who were betting on another year of falling prices for thermal coal, which is used to generate electricity in power stations and is a source of profits for global mining houses likes Glencore and Rio Tinto.

http://im.ft-static.com/content/images/bc279c32-5277-11e6-9664-e0bdc13c3bef.img

At least one big participant, traders say, has been caught on the wrong side of a major position that was designed to protect the company against falling prices. Beijing’s directive has also turned on its head the widely held view that Chinese imports of thermal coal would dwindle from the 140m tonnes purchased last year.

“Thermal coal bears, among which we were one of the biggest, have been reminded this year that it is not wise to fight the Chinese government,” says Colin Hamilton, head of commodity research at Macquarie. “As long as China remains a meaningful thermal coal importer, it will act as a price setter.”

For years China has been trying to put its bloated coal industry on a more stable footing, but latest reforms are some of the first to have an immediate impact on the broader market. Mines normally operate 24 hours a day and seven days a week.

The benchmark price for Asia – thermal coal shipped from the Australian port of Newcastle – is up by more than a quarter since its lows in January and is now trading above $61 a tonne. Other coal markers have seen similar gains but remain well their 2008 peaks of nearly $200 a tonne.

Analysts estimate domestic production in China was down per cent 10 to 15 per cent in May from a year ago, while the latest official data point toward rising imports.

“Before China announced its ‘de-capacity’ efforts, we thought seaborne imports would fall to about 110m tonnes [this year]. But now, we think they’ll hold at 140m tonnes or maybe even get a bit higher,” says Andy Roberts, head of thermal coal research at Wood Mackenzie, a consultancy.

Analysts say the decline in domestic production has coincided with increased demand in China, as power consumption picks up over the hot summer months. Morgan Stanley reckons coal-fired power production rose nearly 5 per cent month-on-month in June and will rise further through July and August.

“The combination of rising demand growth and impaired supply has prompted an inventory drawdown,” says Morgan Stanley analyst Tom Price.

Globally, thermal coal production has been declining for more than a year as the collapse in prices has forced miners to scrap new projects and expansions plans. More recently heavy rainfall has hit supplies from Indonesia, the world’s biggest exporter, intensifying the impact of the policy changes in China.

But traders who handle millions of tonnes of coal a year say the recovery in prices cannot be solely explained by decisions taken China. A weaker US dollar and the oil price, which has almost doubled from its January low, have also contributed. Another influence has been the derivatives market.

Traders say a large coal producer had been selling call options to banks in the over-the-counter market. These trades, known as covered positions, were profitable as long as price kept declining. But that is no longer true.

A seller of a call option pockets a premium upfront but is obliged to deliver an asset at a specified price or time if it exercised by the holder.

Faced with growing losses on the call options as coal prices rallied through June, traders say the producer has been forced to buy futures contracts to hedge its position. But the volume of futures it has been trying to buy has been so big that it has pushed up prices.

“The market didn’t turn because of this position but it is responsible for the ferocity of the move upwards,” says one coal trading executive. “It would have rallied much less quickly without it.”

It is not clear how many futures contracts the producer needs to buy but the view among market participants is that the call options expire in September and December. That is one reason why traders believe prices might have peaked for 2016. They also fears private sector miners in China, attracted by higher margins, might ignore the government rules.

“We do not expect this China induced tightness to hold beyond the next couple of months, but it is tough to be sure,” says Mr Hamilton.

Others are not so sure. Analysts at Citigroup reckon prices could surge to $90 a tonne if the La Niña weather phenomenon that is expected to develop later brings heavy rain to Australia and Indonesia.


Monday, 15 August 2016
20160731 2006 11 Chinese coal-fired power firms to post weaker profits amid capacity glut
2016-08-15 12:06 PM
http://www.scmp.com/business/companies/article/1996668/chinese-coal-fired-power-firms-post-weaker-profits-amid-capacity
Chinese coal-fired power firms to post weaker profits amid capacity glut
Eric Ng
PUBLISHED : Sunday, 31 July, 2016, 8:06pm
UPDATED : Sunday, 31 July, 2016, 10:30pm

Coal-fired power producers on average suffered an 11 per cent year-on-year fall in power prices. Photo: AFP

Weak power demand and rapid growth in new generation capacity to hurt profits of key players

Huaneng Power International is expected to kick off on Tuesday the reporting season for Hong Kong-listed mainland Chinese firms that focus on coal-fired power generation, whose interim profits are expected to have fallen due to lower power prices and falling plant utilisation.

This is despite the fact that savings on fuel costs and interest expenditure from weaker coal prices and interest rate cuts have helped soften the blow.

“For players with more [coal-fired generation] exposure, we expect profit to be … hurt by lower tariffs as a result of both tariff cuts in January [this year] and higher direct power [sales to big end-users that attract lower tariffs], and lacklustre output,” Michael Tong head of Hong Kong and China research at Deutsche Bank said in a research report.

China’s largest power producer sees 8.6pc drop in output in first half

According to Tong, Huaneng, the listed flagship of China’s largest power producer China Huaneng Group, is likely to report a 26 per cent year-on-year decline in first-half recurring net profit to 6.76 billion yuan, while rival China Resources Power (CRP) may see a 23 per cent drop to 5.81 billion yuan. Huadian Power International, another key player, could slide 16 per cent to 3 billion yuan.

Simon Lee, head of Morgan Stanley’s Asia Pacific utilities research, expects milder profit declines of 18.5 per cent for Huaneng, 15 per cent for CRP and 15.1 per cent for Huadian.

He said that a 9 per cent year-on-year decline in utilisation hours of the entire fleet of the mainland’s coal-fired plants, due to weak power demand growth and rapid new generation capacity growth, has played a big role in the profit squeeze.

Power demand on the mainland grew 2.7 per cent year-on-year during the first six months of this year, which was far outstripped by a 11.3 per cent year-on-year increase in installed power generation capacity as at the end of June.

This happened amid a construction boom of coal-fired, nuclear, wind and solar projects, as investors were encouraged by higher industry profits in earlier years, thanks to sharp falls in coal prices and higher subsidised power tariffs for clean energy.

Chinese power producers face multi-year profit down-cycle amid excesses and market reform

But the building boom, coupled with sharply weaker demand caused by China’s economic transition away from energy-intensive industries into service sectors, has led to major surplus capacity and the lowest plant utilisation in 38 years.

Low utilisation is bad for a plant’s profitability since more fixed costs like asset depreciation and maintenance have to be absorbed by each unit of power sold.

Analysts expect the glut to result in much lower capacity addition in the years ahead.

Lower coal prices, with the average price of coal shipped through Qinhuangdao – China’s largest coal port – declining 16 per cent year-on-year in the year’s first half, were insufficient to offset the impact from lower plant utilisation and power prices.

Coal costs typically accounts for around two-thirds of a power plant’s total operating cost.

Coal-fired power producers on average suffered an 11 per cent year-on-year fall in power prices, as a result of an average 7 per cent cut in state-stipulated prices in January and rising direct sales to large industrial users at cheaper prices, according to calculations by Morgan Stanley and Citi’s analysts.

Such sales are encouraged by Beijing as part of industry reform to enhance efficiency via competition and reduce power costs for manufacturers, since such sales allow users and generators to directly negotiate volumes and prices, bypassing the power distributors.

Li Ka-shing’s Power Assets posts higher interim profit due to disposal loss last year

The distributors, which used to earn fat profit margins on state stipulated buying and selling prices with no incentives to cut costs, have been forced to lower operating costs under power pricing reform.

According to Morgan Stanley’s analysts who recently met with industry officials in Guangdong province, which has limited energy-intensive industries, is aiming for direct power sales to account for half of its total power sales by 2020, up from 8 per cent this year.

This applies to electricity generated from both fossil fuel and renewable energy.

“Using power reforms to reduce corporate costs via power tariff cuts is a consensus among central and provincial governments,” Morgan Stanley’s analysts said, adding larger tariff discounts are expected this year as more sales are subject to competition and direct negotiations between buyers and generators.

Meanwhile, CLP Holdings, the larger of Hong Kong’s two power utilities, is tipped by Citi’s head of Asia utilities research Pierre Lau to post on Monday a 5 per cent year-on-year rise in first-half net profit to HK$6 billion, with higher profits from Hong Kong and India more than offsetting declines in Australia and mainland China.

This article appeared in the South China Morning Post print edition as:
Power firms face earnings squeeze


Monday, 15 August 2016
20160808 05 China coal and steel: stop the rot
2016-08-15 11:41 AM
http://nicosiamoneynews.com/2016/08/08/china-coal-and-steel-stop-the-rot/
China coal and steel: stop the rot
August 8, 2016

For the past couple of decades, business professors have spun price deflation as a result of “innovative disruption”. In fact, the old economy – heavy industry – has been slowly killing itself for years. The economic slowdown in China has brought the latest example: overcapacity in steelmaking and coal mining depressing prices. Though the Chinese government understands the problem full well, its latest solution will not work.

China’s coal companies carry a lot of debt; some as much as their entire asset value. The banking regulator, China Banking Regulatory Commission, has had to get involved. To cut banks’ loan exposure to coal (and steel as well), the CBRC reportedly has plans to encourage local governments to aid the most indebted steel and coal companies by participating in debt-for-equity swaps with the banks.

Banks could use the help. In a worst-case scenario, non-performing loans could jump fivefold from the current 1.7 per cent of the total, thinks Credit Suisse. The coal and steel companies are even more needy. Shanghai-listed miners, such as Shanxi Coking Coal, jumped on the reports on Monday.

The promise of intervention in the coal and steel industries has coincided with a big rally in the prices of the underlying commodities. Thermal coal prices in China have jumped by nearly a third from the lows of late last year. Meanwhile, the proportion of Chinese steel mills losing money has dropped to a fifth; a year ago almost all were in the red. All of this eases the pressure on bloated industries and does nothing to remedy overcapacity. Steel production continued to rise in July, and exports are up more than 8 per cent this year.

Finance can provide pain relief but only harsh medicine – shutting uneconomic factories down – can offer a cure. Extending the lives of zombie coal and steel companies will only prolong the “disruption” in these markets.

Email the Lex team at lex@ft.com


Monday, 15 August 2016
20160808 2011 13 China’s Coal-Market Reforms Fuel Rebound in Prices
2016-08-15 12:19 PM
http://www.wsj.com/articles/chinas-coal-market-reforms-fuel-rebound-in-prices-1470654404
China’s Coal-Market Reforms Fuel Rebound in Prices
Benchmark prices for thermal coal in both Asia and Europe have climbed by more than a third since April
By Dan Strumpf and Rhiannon Hoyle
Updated Aug. 8, 2016 8:11 p.m. ET

A coal depot in China’s Heilongjiang province last October; production curbs in China have given prices a lift this summer. Photo: Jason Lee/Reuters

One of the world’s most maligned commodities is staging a comeback.

Coal prices have soared this summer, after new mining restrictions curbed production in China, the world’s biggest producer and consumer. Benchmark prices for thermal coal in Asia, Europe and the U.S. have climbed by more than a third since April, while the price of coal used in steelmaking is up 20% from its 2016 nadir in May.

The rally is a stark reversal for the coal market, which has been in a protracted slide for much of the past five years. Ample production and waning demand in developed countries have pummeled prices for thermal coal, used in power generation. Demand for coking coal, used in steel production, has also softened as global growth has cooled and China reins in its industrial sector.

But efforts to overhaul China’s coal-mining sector-burdened for years by overcapacity-have perked up the market. In April, China’s State Administration of Work Safety introduced new coal-production caps, limiting the number of working days for its coal miners to 276 a year from 330 previously.

“That is massive,” said Robin Griffin, a coal analyst at commodities consultancy Wood Mackenzie, based in Australia’s resource-rich Queensland state. The curtailment has sent production tumbling 14% to 809.3 million metric tons in the second quarter of this year, according to an analysis of government data by Australia and New Zealand Banking Group Ltd. Official data show imports rising 17% year-over-year to just under 60 million tons in the same period.

“People got over their skis that demand for coal, being the dirtiest fuel, would just plummet,” said Harish Sundaresh, a portfolio manager who oversees commodity investments at the $240 billion fund manager Loomis Sayles. “What has actually happened is that Chinese production cuts have actually been larger than the consumption declines.” Mr. Sundaresh said he has been buying shares of coal producers and mining-equipment manufacturers.

The recent recovery offers a reprieve to the world’s beleaguered coal miners. In the U.S., the coal-mining sector has been buffeted by bankruptcies, amid competition from cheap natural gas and tighter emissions standards.

To be sure, coal prices remain far from their recent highs. In 2011, Asia thermal coal breached $140 a metric ton, according to Platts. Coking coal traded at more than $160 a ton when the Steel Index started tracking prices in 2013. At the start of August, a ton of each traded at $66.50 and $101.10, respectively.

In the U.S., benchmark thermal coal traded at $43.80 per short ton at the start of the month, according to Platts.

Despite their recent lift, analysts say several forces are likely to keep prices in check. China, like other big coal consumers, is trying to reduce its coal dependency has imposed limits on new coal-fired plant construction. India, another top coal user, is boosting domestic production with the long-term goal of phasing out coal imports.

Fired Up

After a long slump, coal prices are rebounding this summer as Chinese production slides and imports pick up.

Asia coal prices

China’s coal production

China’s coal imports

Sources: The Steel Index, Platts (prices); ANZ (production); CEIC (imports)

The coal rally is coinciding with the peak demand period for the fuel. Thermal-coal demand typically runs hot at this time of year as summer heat in the northern hemisphere keeps air conditioners active.

In the market for coking coal, the cuts to Chinese production coincided with an energized steel market. Rising Asian steel prices gave production mills more cash to restock inventories of raw materials, including coal.

In addition, flooding in China has sparked speculation about extra steel demand to repair or rebuild damaged infrastructure and buildings.

These factors have helped to mop up a lot of the surplus cargoes sloshing around the seaborne market that resulted from an expansion of coal mining in places such as Australia, the world’s No. 1 exporter of steelmaking coal. “It has brought the markets almost back into balance for hard coking coal,” said Mr. Griffin.

In the first half of 2016, the value of high-ash Australian thermal coal-a particularly “China-centric market,” says Mr. Griffin-rose 22% versus a 5% to 12% rise in the price of various types of Indonesian thermal coal.

Wood Mackenzie forecasts prices for steelmaking coal to hold up over the coming months during what is a typically strong period for steel demand in Asia-China’s peak construction season-before slipping back to the high $80s a ton in 2017. It projects Australian thermal-coal benchmark prices to hold flat near US$60 a ton until the first quarter of next year before easing.

Chinese coal production peaked in 2012, and the country has been pushing to shrink its huge coal and steel sectors. The country has about 9,000 coal mines and as many as 1,200 will be closed in the coming years, according to Platts. The U.S., by contrast, has 833 active coal mines.

“One of the reasons why [China’s] reform plan was put in place was to reduce the number of smaller high-cost coal-miners in the country,” said Gareth Carpenter, editorial director for coal at Platts.

Traders said they are starting to feel anxious about how quickly prices have risen. Some worry that China could loosen the rules on its own coal output to support local industry.

“It’s definitely taken the market-and we include ourselves in that-by surprise over the last few weeks,” said Daniel Hynes, commodity strategist at ANZ. “The market suddenly realized that they were following through on their stated goals, and because expectations were so low, it may have just forced some buyers back into the market.”

Write to Dan Strumpf at daniel.strumpf@wsj.com and Rhiannon Hoyle at rhiannon.hoyle@wsj.com


Monday, 15 August 2016
20160808 2015 03 Chinese province to extend maturity on $60bn in coal loans
2016-08-15 11:30 AM
http://www.ft.com/cms/s/0/8b244b36-5d39-11e6-a72a-bd4bf1198c63.html#axzz4HN2DpoB3
Chinese province to extend maturity on $60bn in coal loans
Don Weinland in Hong Kong and Lucy Hornby in Beijing
Last updated: August 8, 2016 8:15 pm

China’s most coal-dependent province has moved to ease rising pressure on seven of its largest coal miners by extending the maturity on up to Rmb400bn ($60bn) in loans, in a sign of the severity of the bad-debt crisis gripping the country’s depressed coal sector.

The move by Shanxi province marks the first time a local regulator has asked banks for leeway on loans for a select group of companies. It is the latest in a series of tactics employed by the country as it tries to pare bad debt, which by some analysts’ estimates has reached epidemic levels.

The central government last year launched a Rmb4tn-and-counting programme that pushed banks to swap debt from many local government businesses for longer-maturity bonds. This year, Beijing announced a controversial plan in which banks would trade corporate debt for equity in companies.

Corporate debt is a concern across China but the situation is particularly desperate in Shanxi. A four-year slump in coal prices has left miners in the red and private companies unable to repay high-interest-rate shadow-banking loans that date back to a boom in coal prices a decade ago. A collapse in the chain of credit in the shadow-banking sector is reverberating through the province, which accounts for about one-quarter of coal production in China, itself the world’s largest coal industry.

The Shanxi branch of the China Banking Regulatory Commission will allow the province’s seven biggest coal companies to restructure short-term debt into medium and long-term loans, the state-run Xinhua news agency reported.

Shares in the seven state-owned companies soared on Monday – several by their 10 per cent daily trading limit – with a weekend report by respected business news magazine Caixin that Beijing was considering debt-to-equity swaps for the beleaguered sector adding a tailwind.

Pain relief is not the same as medicine

The CBRC did not immediately respond to a request for comment.

The move comes after the deputy provincial government led the seven coal miners on a road show to Beijing this summer in an attempt to convince investors to subscribe to their bonds. One company in May offered five-year bonds at nearly double the yield on comparative notes but the initiative on the whole showed few positive results.

“Coal is an important industry to Shanxi therefore the government has to step in to alleviate the problem,” said Fitch Ratings analyst Alvin Cheng, noting that companies kept on life support worsen China’s glut of coal and other industrial capacity.

At the end of last year, Shanxi’s seven largest coal groups had Rmb1.18tn in debt, almost as much as the province’s Rmb1.28tn gross domestic product in 2015, according to Everbright Securities. Fitch estimates current combined debt stands at Rmb1.1tn, and according to Chinese media the companies have about Rmb600bn in short-term debt.

“If the banks support this, they may be able to get back some of these loans. If not, then most of it will become non-performing loans,” said DBS analyst Chen Shujin.

Some 21 per cent of all bank lending in Shanxi has gone to the province’s seven top coal companies, Zhang Anshun, the head of the province’s CBRC, was quoted as saying by Xinhua.

Official figures put China’s bad debt at Rmb4.6tn as of end-March, or 1.75 per cent of total commercial banking debt in the system. Analysts say the real ratio could be as high as 15 per cent.

China coal and steel: stop the rot http://www.ft.com/cms/s/8a6e8226-5d7d-11e6-a72a-bd4bf1198c63.html
http://im.ft-static.com/content/images/669e9660-f820-4ee3-af5e-f8d029462dd6.img
TO GO WITH China-economy-environment-coal-climate,FOCUS by Tom HANCOCK In this photo taken on November 20, 2015, Chinese flags fly as a worker clearing a conveyer belt used to transport coal, near a coal mine at Datong, in China’s northern Shanxi province. For decades coal has been the backbone of the northern province of Shanxi, providing livelihoods for millions of miners, while private jet owning bosses became notorious for their nouveau riche lifestyles. AFP PHOTO / GREG BAKER / AFP / GREG BAKER (Photo credit should read GREG BAKER/AFP/Getty Images)


Monday, 15 August 2016
20160812 1059 10 China’s Crude Oil, Coal Output Declines Deepen Amid Cutbacks
2016-08-15 12:03 PM
http://www.bloomberg.com/news/articles/2016-08-12/china-s-crude-oil-coal-output-declines-deepen-amid-cutbacks
China’s Crude Oil, Coal Output Declines Deepen Amid Cutbacks
Bloomberg News
August 12, 2016 – 10:59 AM WIB
Updated on August 12, 2016 – 6:38 PM WIB

  • With assistance by Jing Yang

A worker conducts maintenance work on oil pipes at an oil delivery point operated by Bashneft PAO near Neftekamsk, Russia, on Thursday, March 3, 2016. Bashneft is an upstream and down stream oil & gas provider which explores, produces and refines its own oil and gas which it extracts from brownfield reserves in the Russian Federation. Photographer: Andrey Rudakov/Bloomberg

Daily crude output in July falls to lowest since October 2011
Nation’s coal mining output drops 10% from January-July

China’s crude oil and coal production declines deepened as the nation’s oil companies cut spending amid low prices and coal miners slashed output to meet government-set targets.

Crude production last month in the world’s largest energy consumer dropped 8.1 percent to 16.7 million metric tons from a year ago, according to data from the National Bureau of Statistics on Friday. That’s about 3.95 million barrels a day, sliding to the lowest since October 2011. Output is down 5.1 percent during the first seven months of the year. Coal mining during that period slowed 10 percent to 1.9 billion tons.

Chinese oil majors are estimated to have cut capital spending by 10 percent in the first half of the year from the same period in 2015, resulting in a drop in domestic crude production, Sanford C. Bernstein & Co. analysts said in an Aug. 1 report. Meanwhile, coal output is contracting as President Xi Jinping’s government seeks to shut overcapacity and use cleaner fuels. Coal mining fell 13 percent to 270 million tons, the slowest year-on-year decline rate in three months and helping push up spot coal prices at the port of Qinhuangdao to the highest level in 16 months.

“Crude and coal production will post on-year drops throughout 2016 on cost concerns and government efforts to cut industrial overcapacity,” Tian Miao, an analyst with policy researcher North Square Blue Oak Ltd., said by phone before the data were released. “The decline rate of coal production may have narrowed last month with peak demand from the power sector in summer.”

Too Slow

Brent crude rallied almost 90 percent to a peak in June from its 12-year low in January, before sinking into a bear market. Prices are still about 60 percent below where they were two years ago. The nation’s refinery runs averaged 10.7 million barrels a day last month, slipping 2.7 percent from June’s record 11 million, while apparent oil demand fell to the lowest since October 2014. Natural gas output slipped 3.3 percent from the previous year to 10.3 billion cubic meters, Friday’s data show.

Authorities have cautioned that coal mines are shutting too slowly to meet year-end targets. Reductions during the first seven months of 2016 equaled about 95 million tons, or about 38 percent of this year’s goal, according to a statement this week by the National Development and Reform Commission, the country’s top planner. Six state-owned coal miners in Shanxi province, the largest coal-producing region, will shut down 21 mines this year, according to the 21st Century Business Herald.


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Oil Extends Gain Above $44 After Biggest Weekly Jump Since April
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Monday, 15 August 2016
20160812 2323 08 China to use tougher environmental standards to tackle capacity glut
2016-08-15 11:47 AM
http://www.reuters.com/article/us-china-overcapacity-idUSKCN10O065
China to use tougher environmental standards to tackle capacity glut
Fri Aug 12, 2016 11:23pm EDT

http://s3.reutersmedia.net/resources/r/?m=02&d=20160813&t=2&i=1149499133&w=780&fh=&fw=&ll=&pl=&sq=&r=LYNXNPEC7C065
An employee works at a steel factory in Dalian, Liaoning Province, China, June 27, 2016. Picture taken June 27, 2016. REUTERS/Stringer

China will use the stricter enforcement of environmental, safety and energy efficiency standards as well as tougher credit controls to help fight against overcapacity in key industrial sectors, the government said.

The world’s second-largest economy has identified overcapacity as one of its key challenges and it has already pledged mass closures in the steel and coal sectors, but it has so far fallen behind on its targets.

The Ministry of Industry and Information said on Friday in a draft policy document published on its website (www.miit.gov.cn) it would “normalize the stricter implementation and enforcement of mandatory standards” to tackle overcapacity in sectors such as steel, coal, cement, glassmaking and aluminum.

It would implement a “differential credit” policy that would allow lenders to extend loans to help firms restructure while cutting off funding for poorly performing enterprises targeted for closure.

Firms that fail to comply with new energy efficiency targets would be given six months to rectify and would be closed if they fail to make progress. Those that continue to exceed air and water pollution standards would be fined on a daily basis and in serious cases ordered to shut.

It said authorities would cut off power and water supplies, and even demolish the equipment of firms that fail to meet environmental and safety standards. Facilities could also be sealed off to prevent them from going back into operation.

The ministry also repeated a previous pledge to implement differential and punitive power pricing policies to force firms to toe the line.

Beijing is concerned that some local governments have not been acting with enough urgency when it comes to dealing with overcapacity problems. On Thursday, the state planning agency singled out regions such as Inner Mongolia, Fujian and Guangxi for failing to make progress.

China plans to close 45 million tonnes of annual crude steel capacity this year, and 250 million tonnes of coal production, but only a third of the closures were completed by the end of July, the National Development and Reform Commission said.

(Reporting by David Stanway; Editing by Jacqueline Wong)


Monday, 15 August 2016
20160814 1425 09 China’s output cuts fuel demand for coal, trims inventories
2016-08-15 11:49 AM
http://www.scmp.com/business/companies/article/2003022/chinas-output-cuts-fuel-demand-coal-trims-inventories
China’s output cuts fuel demand for coal, trims inventories
Sarah Zheng
PUBLISHED : Sunday, 14 August, 2016, 2:25pm
UPDATED : Sunday, 14 August, 2016, 10:07pm

China’s coal industry has been facing a torrid time since 2012 as demand weakened due to the slowing economy. Photo: Reuters

Rapid production of coal has led to an oversupply in the market, causing miners to incur significant losses and prices slumping to six-year lows. Photo: Reuters

Top firms set to post lower profit declines for the first six months of this year, say analysts

Though China’s embattled coal industry is enjoying a windfall of sorts on the back of rising demand and shrinking inventories, leading coal firms are still expected to post losses for the first six months of the year, analysts said.

According to a research report published by Bank of China (BOC) International last week, coal prices will continue to climb in China, the world’s largest producer and consumer of coal, this month. The report said coal prices have been bolstered by supply cuts, shrinking overcapacity and increased demand for thermal coal in summer months.

Evidence that prices are picking up is already visible on the ground with China Shenhua Energy, the world’s largest state-owned coal supplier, increasing its contract prices for August by 18 yuan (HK$21) per tonne to 435 yuan (HK$508) per tonne, according to China Coal Resource Net. According to analysts, the company is expected to make further increases subsequently as its contract price is 20 yuan lower than the spot price, or current market price, which allows room for further growth.

Chinese coal-fired power firms to post weaker profits amid capacity glut

“We may see contract prices surging in the low seasons of September and October and catching up with the spot prices,” BOC International analysts Maggie Sheng and Lawrence Lau said in the report. “Such moves will benefit Shenhua and the whole coal sector in the long run,” they said.

Spot prices of other categories have also seen an increase. Prices of Shanxi high grade thermal coal at the Qinhuangdao port rose by 50 yuan per tonne in July, while in Guangzhou, thermal coal jumped by 55 yuan per tonne to 500 yuan per tonne during July.

That is good news for China’s coal industry which has been facing a torrid time since 2012 as demand weakened due to the slowing economy, China increased its use of clean fuels and the Chinese government renewed efforts to reduce carbon emissions, according to a report from the Oxford Institute for Energy Studies. In recent years, the rapid production of coal has led to an oversupply in the market, causing miners to incur significant losses and prices to fall to six-year lows, a Wall Street Journal article said. The government responded to this by taking steps to curb overcapacity like lower output targets, regulations limiting working days for miners and curbs on construction of new plants. Unnecessary and unprofitable mines were forced to shutter operations, a Bloomberg report said.

China reaffirms plan to cut steel and coal production

The measures yielded fruit with inventories of six major coal producers falling to the lowest in 32 months in late July, the BOC International report said. In Qinhuangdao, inventories dropped 20 per cent from July to August to 2.7 million tonnes, its lowest level in eleven years. But despite these historically low supply levels, coal miners this year are actually behind schedule to cut overcapacity, having only met 38 per cent of their targeted reduction of 250 million tonnes by the end of July, a National Development and Reform Commission (NDRC) statement on its website said.

Supply reductions and higher prices have helped soften profit declines for major coal companies this year. China Coal is expected to report a 13 per cent decrease in profits, or a net loss of 73 million yuan (HK$85.3 million), in the first half of the year by International Financial Accounting Standards (IFRS), a lower profit decline than in 2015. By Chinese Accounting Standards (CAS) – a standard measuring inventory of assets available to companies – China Coal will actually end up with a net profit of 350 to 520 million yuan in the first half, the BOC International report said.

Shenhua Energy is predicted to see profit fall by 27 per cent in the first half to 9.5 billion yuan under IFRS and 9.4 billion yuan under CAS from the same period a year ago, according to the report. Yanzhou Coal is likely to report profits of 166 million yuan under IFRS, up from its 51 million yuan loss in the first half of 2015. Its recovery has been helped by stringent cost control measures, Sheng and Lau said.

Shougang Fushan Resources Group is expected to incur a net loss in the first half of the year, as a result of lower raw coal output and an 18 per cent drop in the price of its No. 4 raw coking coal in Liulin.

The Chinese government has been wary about the coal market rebound, Sheng and Lau said.

“If coal prices surge too much too soon, it will be difficult to strictly implement the supply-side reform,” the analysts said, referring to China’s economic growth strategy of capital investment and decreased production barriers.

China prefers to have gradual recovery over rapid surges, they added.


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