China Flash #4
The annual Coaltrans conference in China was held in Beijing last week. The sentiment was rather pessimistic and consolidation is taking place among local coal traders. With several vessels en route to South America to load grains, the freight levels for importing coal to China has seen a slight increase. Fair winds are always welcome.
The China GRAIN market has been more active recently but has now calmed down. Requirements have primarily been from East Coast South America. There are mixed views on the freight market for Q3 and Q4. Crushing margins in China are still negative and several crushing plants are reluctant to pay up for forward cargoes.
IRON ORE AND STEEL markets decoupled for a period. On the one hand we had a firm steel market with increasing prices on the back of low stockpiles and improved seasonal demand. On the other hand iron ore price remained flat and stockpiles were increasing. Iron ore price has now increased somewhat. Currently about 80% of the domestic steel mills are operating at a profit. Although we expect the steel market to remain strong, we doubt whether it will be sufficient to support the Panamax and Supramax markets. For that to happen we may need to see even higher iron ore price so the smaller overseas mines become competitive.
Shanxi province will suspend and improve more than 100 COAL mines for at least one month. These mines will resume work only after passing strict safety control which may reduce domestic coal supply with about 12 million tonnes in April, accounting for 4% of the total monthly output in China. Although a short term reduction in supply may support import to some extent, persisting weak demand is expected to have a greater influence in the longer term. Most importers have taken a wait-and-see approach as offer prices for overseas coal are relatively high and expected to stay firm in the short term. Most Australian material was sold to Taiwan and Japan last week. End users in China preferred low-CV Indonesian material.
Otherwise China is likely to see total investment in the railway sector hit a new high this year. China Railway Corporation plans to kick off construction on 45 projects in 2016 and put more than 3,200 kilometers of new railway lines into operation. Last year the railway sector registered 823.8 billion yuan (USD 127.16 billion) in fixed-asset investment.
Have a nice week!