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China’s coal prices have sunk to levels that threaten state intervention, but this time policy makers may refrain from doing so as they continue efforts to buttress the economy hurt by the coronavirus pandemic.

The government will try to keep power prices low as it pushes to restart the economy, according to analysts. That goal will be helped by the decline in benchmark prices to just above 500 yuan a ton, the lower end of a range that Beijing generally tries to maintain.

“I don’t think the government will intervene too much as lowering energy costs could be one of the objectives during the Covid-19 period,” said Dennis Ip, an analyst at Daiwa Capital Markets Hong Kong Ltd.

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China is the top user and producer of the fuel, and has sought to balance the needs of its power enterprises and miners by securing a “green zone” price of between 500 and 570 yuan. In the past few years, spot prices have mostly held above that range due to stricter scrutiny of local mines, elimination of old capacity and clampdowns on imports to spur demand for domestic coal.

This year, prices have fallen as new capacity ramps up. With Beijing pushing to get the economy back up again after weathering the worst of the coronavirus outbreak, miners are urged to expedite output resumption. Demand, however, hasn’t quite kept pace.

Government controls and the fear of going outside curtailed the speed of recovery previously. Now there’s a growing threat from slumping external demand as the virus has put many other countries in lockdown.

Morningstar analyst Jennifer Song estimates that the downstream sector has resumed about 75% of normal operations according to daily coal consumption data, whereas miners would have fully restarted.

Market Mismatch

“There’s a mismatch in the recovery pace of supply and demand,” she said. “Based on this, we would think the government may need to wait for more clarity on the supply-demand balance before making any policy move.”

Furthermore, coal miners would have made quite a tidy sum between 2016 and 2019 when prices were elevated, Song added. This should help them to cope with the recent price declines.

Spot coal at Qinhuangdao port retreated for the past seven weeks to 509 yuan a ton as of April 7, the lowest since September 2016, according to China Coal Resource. Futures on the Zhengzhou Commodity Exchange are trading below 500 yuan.

Should authorities intervene to stem the rout, tightening import controls may be the preferred course of action over mandating production cuts, said Zeng Hao, deputy general manager at China Coal Resource.

The government in 2016 forced miners tocut output to revive low prices and help them manage debt. Those policies were so effective that it sent prices soaring and officials scrambling to reverse some of the impact.

Import Controls

Then in mid-2017, Beijingbanned some incoming shipments to manage the nation’s coal supply and prices. Since then, it has frequently turned to its import policy to steer the domestic market, limiting the amount of competing coal from overseas when it wants to bolster local miners, and relaxing those curbs to tame price rallies.

Recently, some southern ports havecut import quotas amid weak demand from extended factory shutdowns caused by the virus. This follows a 33% year-on-year surge in January and February shipments.

If the restrictions are extended, prices of Asian seaborne supply could be further hit. Australian Newcastle coal futures tumbled to $59.40 a ton as of Thursday, the weakest since July 2016.

“The government will target coal imports first; if that’s not enough, they may resort to cutting domestic output,” Zeng said. “Prices that stay low for too long won’t be healthy for the industry.”

— With assistance by Jasmine Ng, and Jing Yang

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