Thermal coal futures contracts traded in China are down sharply - Energy

Thermal coal futures trading in China almost stopped during trading Monday, May 16, down 99.9% from a year ago.

Thermal coal futures trading saw a sharp decline of just 27 contracts, on Monday, on the Zhengzhou Commodity Exchange (ZCE), compared to about one million contracts a day at times.

This came as a result of Beijing’s tight control over coal prices to curb the high costs of energy and raw materials.

Liquidity depletion

Zhengzhou Commodity Exchange data showed that the sharp decline was the lowest daily level since 2015, according to Reuters.

thermal coal
An excavator loads coal into a train in China’s Henan Province – Photo courtesy of Reuters

Liquidity began to fade after Beijing intervened in the world’s largest coal consuming market since last September, to calm price hikes.

And last February, the country adopted reference price levels for trading thermal coal for long-term and spot contracts.

The state scheme in China also promised to punish any behavior that drives prices in both the spot market (monetary market) or futures contracts.

The impact of this was evident in the trading volume and total open positions of the coal futures contracts, which are two main components of the financial derivatives activities.

Open positions mean the number of contracts or commitments outstanding in futures and options trading on the exchange.

Open positions for the most heavily traded September contracts were 479 contracts, or about 47,900 tons of coal, down from 294,273 contracts on April 29 last year.

According to analysts, the priority in the Chinese futures market – currently – has become to support the country’s efforts to maintain price stability by curbing market activity, and the market can only do hedging or exploring prices if there is sufficient liquidity.

The Zhengzhou Commodity Exchange has implemented at least 6 adjustments to margin requirements, transaction fees and the maximum amount of open positions per day for thermal coal futures contracts since 2022.

For their part, coal traders are of the opinion that despite the current situation of supply and demand, there is no point in trading coal futures anymore, as the government sets prices, and no one dares to cross red lines.

curb prices

In addition, China’s state scheme asked some of the major coal price index providers to correct irregularities during an investigation that lasted nearly half a year.

The National Development and Reform Commission launched an investigation with 15 index providers in October, after prices hit record levels and disrupted production.

Through the investigation, the committee found some violations that misled the market and resulted in an increase in prices, and discovered that some index providers participated in the trading.

At the same time, it demanded that they correct these irregularities within a specified period, and this forced some influential institutions to stop publishing their spot coal price assessments.

thermal coal
Excavators collecting thermal coal in Jiangsu Province – Photo by CGTN

Thermal coal prices in Zhengzhou were 849 yuan ($125.07) per ton on Monday, May 16, while a ton of standard Newcastle thermal coal was $392.85.

coal production

On the other hand, China’s daily coal production jumped 11% over the past month, compared to the same period last year, supported by the decision to increase supplies.

And data from the National Bureau of Statistics showed, today, Monday, May 16, that China – the largest coal producer in the world – extracted 362.8 million tons during the past month, equivalent to 12.09 million tons per day, compared to 12.77 million tons per day in March, and 10. 74 million tons per day last year, according to Reuters.

Beijing aims to increase daily coal production to 12.6 million tons and build a national stockpile of 620 million tons to ensure adequate supplies.

The government also urged regions dependent on imported coal to sign more contracts for at least a year, with local coal producers, to provide supplies.

China’s central bank revealed that it has allocated 100 billion yuan ($14.7 billion) in loans to power plants to support coal production, storage and purchase.

Beijing has also capped thermal coal prices under spot deals or fixed-term contracts to ease inflationary pressures and balance profits between coal mines and utilities.

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