Macquarie Research, : Chinese thermal coal market update

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China Commodities Call
Chinese thermal coal market update
 Chinese thermal coal prices bottomed-up this week after six weeks of
continuous decline. Qinghuangdao (QHD) 5,500kcal coal is quoted at
Rmb780/t ($118/t including VAT) this week, Rmb10/t ($1.5/t) higher than last
week. We believe QHD coal price to recover from recent lows to last
November highs of Rmb820-830/t ($124-125/t) range approaching to the
Chinese New Year period along with lower temperature stay over the winter
and railway capacity tightening up over the holiday season.
Industry news
 From early 2011, the Chinese government will lower its tax rebate to scrap
dealers for the material they trade. Therefore, the net VAT payment will rise
by an estimated 5–6% to a level of 11–12%, compared with 17% paid for the
refined metal. As a result, traders’ cost of scrap purchase will be up in 2011 in
China leading to 1) a growing shift of demand into refined metal this year
and/or 2) a move up of refined copper prices to match up the scrap cost rise.
 The State Grid has announced it plans to spend around Rmb290bn in 2011
on expanding and upgrading its network (a rise of 10% YoY). Given Chinese
spot copper prices are up almost 25% relative to average prices in 2010, this
implies a potential fall in copper consumption in 2011 relative to 2010. We
expect the spend numbers projected for 2011 were put together when copper
prices were lower than they are at present, and expect the spend numbers will
be revised upwards over the coming year. Indeed, our sources indicate that
owing to the increase in projects to be delivered in 2011, copper consumption
from the State Grid will rise YoY in 2011 regardless of the copper price level,
something which ties in well with the fact that the State Grid often spends
more than it initially states in years of rising commodity prices (final spend in
2010 was Rmb264bn, up from Rmb227bn). We anticipate at least 5–10% YoY
growth in copper consumption from the State Grid in 2011.
 Iron ore stocks at major Chinese ports have been rising for three consecutive
months to a record high of 80.9mt on January 7 2011, 1.39mt higher from a
week ago. Traders and steel mills restocking ahead of Chinese New Year and
expectation of higher prices pushed up Chinese stockpiles moving above
historical highs. Steel mills tend to place small orders under the spot
transaction if there is requirement to replenish their stocks with the concern of
price weakening following recent spike on the seaborne market.
 Leading steel makers are raising prices in early 2011 as consumers build
stock for the upcoming New Year following restricted supply over 4Q10. This
round of price rise was led by Shagang with an Rmb50/t ($7.6/t) rise for 11
January–20 January. Baosteel and Wuhan Steel followed with a price rise of
Rmb100/t ($15/t) at Baosteel, and Rmb50–300/t ($7.6–45.3/t) at Wuhan.
Other mills in domestic market are expected to follow as well. The spot market
has been firm recent with rebar HRB20mm moving up to Rmb4,750/t ($707/t)
on January 14 in China, up Rmb50/t ($8/t) from a week ago.