Mining in Indonesia: Coal Price to Remain Stable on China Policies
Despite seeing a supply surplus in Asia, coal prices are expected to remain stable in the foreseeable future supported by expectations of Chinese intervention into domestic coal production. China is the world's largest producer and consumer of coal and therefore the main determinant of the coal price. On Friday (19/05), the Newcastle coal index (May 2017 contracts) rose 0.27 percent to USD $74.25 per ton.
While in the first four months of 2017 coal imports into China surged 33 percent year-on-year (y/y), these imports are now expected to slow as China's domestic coal production is expected to rise in Q2-2017.
Weakening coal demand from China should give rise to increasing coal supplies in Asia and Australia and therefore pressure on the coal price (this explains the weakening coal price since the year-start). However, China is expected to remain committed to its policy of intervening in its domestic coal production (by cutting working days in the coal mines) in order to support the coal price and make the coal sector a profitable business for miners (when the coal price falls below 535 yuan - approx. USD $78 - per ton, then Chinese authorities curb coal production).
Most of China's coal miners had to cope with net losses between 2015 and mid-2016 amid very weak coal prices. Matters improved drastically in the second half of 2016 when coal prices surged high after China decided to cut coal production. At the start of 2017 coal prices again weakened due to rising coal production in China as well as in other key coal producing nations.
Basically the key reason why China wanted to push the coal price into higher territory in the second half of 2016 is that China's non-performing loan (NPL) ratio in the domestic banking sector had risen to 2.3 percent in 2015. The main reason for this rising NPL ratio was that China's coal mining companies had trouble to repay debt.
However, demand for coal is undermined by China's decision to limit the number of new coal-fired power stations. Still, given the relation toward its banking system, China is expected to remain committed to keep the coal price stable at around USD $75 per ton in the remainder of 2017.
Read more: Overview of Indonesia's Coal Industry
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