Short-term tight supply and demand support upward trends in the prices of thermal coal futures

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Recently, the scale of production shutdowns in coal-producing areas, coupled with strong demand for thermal coal, has led to a tight supply-demand situation that has pushed up coal prices. At present, it is difficult to reverse this upward trend in prices. However, in the long term, there are still uncertainties; regarding the continued rise in prices, caution is needed regarding the risks associated with high levels. Short-term demand for thermal coal remains strong. Recent heavy rainfall in most parts of China, along with lower temperatures, has increased the demand for heating. Coal consumption by coastal power plants remains high, while their coal inventories are low. As of January 23, the six coastal power plants consumed 740,000 tons of coal per day, which is 187,000 tons higher than the average daily consumption in previous years. The coal inventory at these plants was 9.836 million tons, 2.26 million tons lower than the average over the past three years, resulting in significant pressure on these plants to replenish their coal stocks. According to reports from the Central Meteorological Observatory, in the next 10–15 days, cold air will be frequent and strong in China, with low temperatures in most areas of the central and eastern regions. It is expected that the rigid demand for thermal coal will remain unchanged until early February. However, it should be noted that as the Spring Festival approaches, industrial demand will decline, and the pressure on demand for thermal coal may ease. From the supply market perspective, there is short-term supply tension. The approaching Spring Festival, strict environmental regulations, and stringent controls on coal permits have led to an expansion of the areas where production has been halted in the main coal-producing regions. In terms of transportation, some railway authorities have raised freight rates; coupled with the suspension of operations 10 days earlier than usual due to the Spring Festival travel rush, there has been intense demand for coal in these regions, which has also driven up trucking costs. As a result, it is difficult to improve the supply situation. The market generally expects production to resume after March 15, and concerns over a persistent supply gap have driven up the prices of the March and May futures contracts. However, since the second half of 2017, the replacement of coal production capacity has accelerated, and advanced production capacities have been gradually brought online; as a result, the supply situation in the long term is not as pessimistic as expected. Nevertheless, there remains uncertainty regarding the strong prices of long-term contracts. The policy of ensuring supply and stabilizing prices remains unchanged. Since 2018, spot prices have continued to rise, leading to increased losses for power plants. Relevant departments such as the National Development and Reform Commission have repeatedly emphasized the need to ensure supply and stabilize prices, which has triggered a series of reactions in the market. First, the policies restricting imported coal were temporarily lifted; earlier there were rumors that these restrictions would expire in mid-February, but officials from the National Development and Reform Commission denied this, stating that the restrictions on imports will remain in place ； Secondly, it emphasizes the stability of coal transportation, with port coal inventory levels rising against market trends. Thirdly, the major coal producers have voluntarily reduced their quotes in the coal market, cutting them by 15–20 yuan per ton starting from mid-January. Although these measures have not succeeded in curbing price increases in the short term, it is not ruled out that further actions such as intervention in miners’ production will be taken to stabilize market supply; policy risks will still need to be taken into account in the future. Strong short-term demand, coupled with market concerns over medium-term supply shortages, has driven futures prices to new highs. The May contract has seen rapid upward movement, and it is difficult to identify any resistance levels at present; the strong trend is likely to continue in the short term. However, due to weakening medium-term demand and increasing policy risks, the price of the May contract for thermal coal needs to be handled with caution.