Machinery operates at an open pit coal mine in Narisong county, Inner Mongolia autonomous region. Nelson Ching / Bloomberg

Commodity's value won't rebound sharply, may drop further: Analysts

Coal prices in China are likely to rebound later this year as inventory declines while demand recovers along with the economy, leading producers China Shenhua Energy and Yauzhou Coal said on Monday.

China Shenhua Energy, the country's largest coal producer, said the domestic coal inventory, which had soared in May and June, has decreased to a "reasonable" level from its peak as China's cooling economy led to weakened demand.

The coal inventories at China's seven major ports have fallen to 18.5 million tons from 24 million tons at the end of June; while inventories at power plants also reduced from 97 million tons to 85 million tons, Shenhua's Vice-President Wang Jinli said in announcing the company's interim results at a press conference in Hong Kong on Monday.

"The coal price has stabilized and is showing signs of recovery," said Wang, adding that the spot coal prices have increased by around 10 yuan per ton, after stabilizing for three consecutive weeks.

He stressed that the domestic coal price is closely related to the global economic environment as well as to the mainland's economic situation, as the Chinese economic growth is expected to be stronger in the second half. He believes that there is room for coal prices to rebound in the second half too.

Shenhua's view was echoed by Yanzhou Coal Mining Company, which also expects the coal price to stabilize and pick up in the second half.

Speaking during the interim results announcement on Monday, Yanzhou Coal Mining's chairman Li Weimin said that the "steady growth" of the Chinese economy as well as the implementation of coal production reduction policy will all provide support to the domestic coal price in the second half.

"At least, the coal prices will stop dropping in the second half," said its director Wu Yuxiang, "and we are expecting the price to pick up a little in the fourth quarter."

BOCOM International analyst He Wei, who does not completely agree with the coal producers, told China Daily that as a result of less demand, the benchmark thermal coal prices at China's Qinhuangdao had dropped to around 620 yuan per ton from 800 yuan so far this year, but it may not have reached its bottom yet.

"The bottom of (the) coal price could be as low as 580 yuan to 600 yuan a ton."

He Wei said the benchmark coal price in China may stay at a relatively low level, and the price range could be between 600 yuan to 660 yuan a ton in the second half.

"A sharp rebound of coal price is very unlikely to happen."

Scarlett Chen, analyst at Citi Research, said in a report that currently the high coal inventory at power plants deter Qinhuangdao prices rising any higher.

"We think the coal price might go sideways in the third quarter, and gradually trend up by October and November, when burn rates picks up seasonally and hydra utilization drops," said Chen.

On the other hand, if there is any recovery on industrial production, that would be extra positive to coal price, she added.

sophiehe@chinadailyhk.com

(HK Edition 08/28/2012 page2)