Chinese Coal demand is due to slow in the next five years, said a report from Barclays."…important development has been a moderation in the trend growth of Chinese imports,
with domestic production seeing good gains and, just as importantly, domestic transportation infrastructure improving. While Chinese coal demand is set to continue to experience significant growth (another 300 GW by 2015 of power generating capacity), the investment in domestic production and transportation infrastructure could outpace that growth in the coming years.' the report noted.
While this is unlikely to shift China from being a net importer, the trend growth could be reversed over the next couple of years and should stem any future increase in Asian benchmark prices.
The reversal is unlikely to be sustained much beyond the next couple of years, as the ever-increasing demand will start to meet this capacity and imports should start to increase mid-decade, the report added.
The range-bound trading of the core benchmarks for coal has been something of a mystery over the summer. API2 failed to dip below $120/t and instead, by mid-September, was back in mid-range at $125/t. While the early-year disruptions of supply at the key exporters may still be an influence, the price support has come against a period of heightened price sensitivity amongst some of the biggest Asian importers.
While Coal is still being traded, a distinct preference for lower grade coals has emerged at what remain high coal prices.
Coming back to Europe, the support in the API2 benchmark seems to have come from utility buying and the improvement in German clean dark spreads over the past few months might help explain that buying pattern.
Another factor helping demand has been the higher level of hub gas prices in the UK, with prices over the summer being some 40% higher than last summer.
Moving into the winter, prices are likely to stay in range, and weather exposure does mean it is a hard call to go short in the immediate term.
European demand, however, is set to continue on its downward trajectory, and the non-stop addition of renewables into countries such as Germany and the UK will continue to reduce power spreads and lower coal-plant utilisation