Commodities Comment:China thermal coal: supply restraint outshone by demand weakness

With Chinese domestic thermal coal spot prices at their lowest level sinceMay 2004, Chinese coal miners have seen their financial conditionsdeteriorate further this year, despite moves to become more efficient. In thisenvironment they are likely to look for further cost savings, and we think coaltransportation is an area where these might be made.

    However we also think that there is reason for cautious optimism with regardsto Chinese domestic coal pricing. Supply cuts have already been made by theminers; they were just outshone by very weak demand YTD. But if latestinventory data is used as a guide to the market balance, then we may haveflipped into deficit. This doesn’t mean immediate price upside, but doessuggest the supply-demand balance could be better than many investorsenvisioned. In the near future, a weakening of water inflow into hydro powerstations and high temperatures in coastal cities could provide a respite for thethermal coal market.

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    As China’s domestic steel prices have recently seen a bounce, investorsmight be asking themselves whether the economy is starting to look better. Inthis regard, our high frequency data for property sales looks encouraging, asdaily sales remained strong in the 12 tier-1 and tier-2 cities we track. Totalsales in the sample were 69% higher this July than a year ago, and alsoslightly better than the hefty level seen in June. Impressive sales, however,don’t seem to have translated into stronger construction activity