Power Coal Market in Shaanxi and Inner Mongolia under Security Inspection

In the second half of 2019, the power coal market will be facing steady increase of supply in production areas, relaxed import volume in the third quarter and tight situation in the fourth quarter, downstream power demand will continue to fall, and the demand for thermal power will be replaced by clean energy such as hydropower. In addition, high stocks in midstream ports, high stocks in downstream power plants and low growth in daily consumption will all work together. In the summer peak season, prices of coal or other factors may fall. It will be under pressure, and may be affected by the import coal restriction policy in the fourth quarter and be strong in the short term, but it is difficult to change the basic pattern of loose supply and demand.

1. From the end of 2018 till now, the trend of coal price reverse seasonal cycle is more obvious. Safety inspections caused by mining accidents in the production area were shrouded in the first half of 19 years, which led to the dominance of supply side drive in the first half of 2019. After the market rose due to winter expectations at the end of October 2018, the peak season of coal prices continued to fall with the coming of winter in the north. Under the background of high inventory and high daily consumption in the downstream, the supply can still be guaranteed stably, and the coal price shows the situation of excess supply and demand in the downstream. This fully demonstrates that China's coal production capacity and demand has changed from a tight balance caused by supply-side reform in 16 years to a relaxed state. With 19 years of continuous production of new capacity, the pattern of loose supply and demand will be further confirmed. Under this anticipated background, the low price of coal oscillated at the beginning of 2019. However, the unexpected mine accident in the later period triggered a severe security inspection situation, which once again triggered the supply side waves.

On January 12, 2019, a huge mine accident occurred in Baiji Mining, Yulin, which resulted in 21 deaths. On February 23, another major safety accident occurred in Yinman Mining, Inner Mongolia, which resulted in 22 deaths. Successive major mine accidents have caused a sharp rise in safety concerns, and the production of coal-producing areas has been severely affected. At the same time, in February 2019, China began to carry out strict censorship of Australian coal imports, resulting in restrictions on Australian coal imports. In the process of short-term risk factors and long-term easing of production and demand, around the Spring Festival, during the period of the weakest demand in the whole year, the coal price in the production area continued to rise, driving the coal price in the port to rise until April 11, when the coal price in the port reached the high point of 2019, and the price of power coal in the futures delivery benchmark of 5500 cards was about 640 CNY/ton. In the period of post-mining disaster, when the production of the production area is limited and the demand is low, the weakness of both supply and demand eventually manifests itself as the price rises, the inventory of the middle and lower reaches keeps rising, and the price of coal in the port is lower than that in the production area. In the case of rising prices in production areas and hanging upside down at the port, the port took the lead in declining. Subsequently, spot prices in Northern Port continued to decline until mid-June. The anticipation of peak season falls short, and falls again before the peak season. The situation of counter-seasonal cycle continues.

 2. The situation that coal market is decided by the supply side gradually turns to the demand side after May. How to deduce it later needs to pay more attention to the balance of supply and demand movement. Domestic raw coal production has been bumpy all the way, but the total volume is still growing substantially. It is expected that the stable increase will be the main trend in the later period. Since 2019, the supply side of the production area has suffered frequent mine accidents, the situation of safety inspection is grim, and it is difficult to resume production after the Spring Festival in Shaanxi Province. It seems that production has greatly shrunk. However, according to the national raw coal production data, the output of raw coal in 2019 is still rising steadily, even reaching nearly 3% and more than 5% in March and May. This shows that our previous judgment on coal productivity is correct. But what we know about the serious problem of production restriction does not exist?

Of course not. According to the output data of Shaanxi, Inner Mongolia and Shanxi, the output of raw coal in Shaanxi has indeed shrunk considerably, with the cumulative decrease of 13.2% in the first half of the year over the same period. However, the output of Inner Mongolia and Shanxi increased substantially. From January to May, the output of raw coal in Shanxi increased by 8.4% and that of raw coal in Inner Mongolia by 7.2%. From the monthly sub-item data, Shaanxi's output reduction rate is gradually recovering, Shanxi's output increase rate is relatively stable, and Inner Mongolia's output increase rate is the highest in May.

In June, Shaanxi published the sixth and seventh batches of re-production lists in succession, and since this year, the advanced production capacity approved for new construction and capacity replacement has been gradually implemented. Shaanxi coal production is expected to gradually recover. According to the production rhythm of Shaanxi in previous years, the output in June will increase by 3-4.5 million tons compared with May. If the quota for resumption of compliance in Shaanxi Province is increased, there may be a greater increase in production in June. However, it is still a question whether Inner Mongolia can sustain such a large increase in production. Since June, the overload of trucks has been strictly controlled in Inner Mongolia, which makes it difficult for Inner Mongolia coal mines to be transported abroad. Then it affects the sales and output of Inner Mongolia Coal Mine. The data of coal transportation and marketing in Ordos since June are only comparable to those in March. If the data of the whole Inner Mongolia area are estimated at the level of Ordos, the output of Inner Mongolia in June may decrease by 8 million tons annually, which may lead to a decrease of about 9% annually in June of 19. In terms of historical data, due to environmental protection, safety inspection and other reasons, the data in June and July of the previous two years in Inner Mongolia were lower than that in May, so the year-on-year decline in June of 19 may still maintain an increase of more than 17% over the same period of last year.

The joint announcement issued by the Development and Reform Commission and the Energy Bureau on June 25 calls for overall planning of energy supply during the summer of 2019, accelerating the release of high-quality coal production capacity, taking the lead in implementing the responsibility of increasing production and supply in key coal-producing areas such as Shanxi, Shaanxi and Mongolia, and actively tapping potential increments for large coal enterprises; accelerating the construction of gas storage facilities scientifically in various regions; and encouraging the development of coal storage facilities; Conditional enterprises establish coal product reserves in coal production, consumption, railway transportation hub and main transit ports, and cultivate and build a number of coal storage bases in accordance with reasonable radiation radius.