China in Focus...Confidential. © 2020 IHS Markit®.All rights reserved. Long-term seaborne demand: peak demand has already occurred 6 0,0 200,0 400,0 600,0 800,0 1000,0

Confidential. © 2020 IHS Markit®. All rights reserved.Confidential. © 2020 IHS Markit®. All rights reserved.

China in FocusCurrent understanding and outlook

July 2020

Diyana Putri Alan

Energy Markets Editor

Coal, Metals and Mining

IHS Markit

[email protected]

Kiara Zhong

Senior Research Analyst, China and Taiwan

Energy | Natural Resources

IHS Markit

[email protected]

mailto:[email protected]

mailto:[email protected]

Confidential. © 2020 IHS Markit®. All rights reserved.

Global Supply & Demand – Where are we now?

2


Thermal coal import demand to decline around 82 MMt this year

3

Changes in thermal coal imports, 2019 to 2020

Source: IHS Markit © 2020 IHS Markit

• Indonesian markets have been hit hard with

India, Mainland China, South Korea and

Southeast Asia down.

• The one positive for Indonesian exports is

Vietnam, where imports have been soaring. IHS

Markit expects Vietnamese coal imports to rise

12 MMt this year.


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Indonesia Australia South Africa Colombia RussiaUnitedStates Canada Mozambique Mongolia

2020 supply cuts needed Supply reductions YTD + announced cuts

Changes in thermal coal supply expectations


Year-

on

-year

ch

an

ge 2

019 t

o 2

020 (

MM

t)Actual cuts are rising towards required cuts, but still more needed

4

Required cuts: 82 MMt+

Cuts YTD + announced: ~69 MMt


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US

D p

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metr

ic ton

NW Europe 6,000kc Newcastle FOB Newcastle 5,500kc FOB M42 FOB

Coal prices


More tons need to be incentivised offline, hence continued weak prices

Q320 Q420

28.00 29.52M42

Q320 Q420

39.50 42.00 Newcastle 5500kc

Q320 Q420

44.00 43.00 NW Europe 6000kc

5

IHS Markit presentation to JFE | June 2020

Q320 Q420

50.50 53.00 Newcastle 6000kc


Long-term seaborne demand: peak demand has already occurred

6

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2015 2020 2025 2030 2035 2040 2045 2050

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etr

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Long term demand outlook post COVID-19


ICMA Presentation


Supply: the next ten years will see growth, but decline thereafter

7

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etr

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Long term supply outlook post COVID-19


ICMA Presentation


China: Quota System and Domestic Pricing

8


2020 China Import Policy - The Quota System

• Total import quota was said to be the same as the 2017 or 2018

total import volume, which was 271mt or 281mt respectively;

• Quotas are allocated through two systems - to importers and to the

ports.

• The basic logic is that each importer does the same thing as they

did in 2017 to achieve the total intake volume. For example, Group

A has imported X amount of coal through port B in 2017. Their

quota this year at port B will be X amount.

• Problems have been raised in practice with the demand changes in

groups, regions and seasons.

9


> Energy security

> Use import coal as supplements or a tool to stabilize domestic

coal market when necessary.

> Protect China’s domestic coal injustry;

• Additional rules to have a better control of the quota system:

> Reduce the non-local customs declaration.

> Set quota at different levels (Quota to Province/customs/end-

user);

> National Development and Reform Commisssion (NDRC) has

encouraged more quota to be released in peak seasons to

secure supply and stabilize domestic price.

10

Competitive international coal prices are not encouraging authorities to relax import restrictions

Why control imports?


• Issues fund in previous years.

- Non-local custom clearance.

- Duplication in quota usage and flexible on

quota allocation

- Deplete the allocated quotas early and apply

for additional quota in peak seasons

• Limit non-local custom clearance

• Allocate quota to different levels and less flexibility.

• Breakdown the quota into quarters and even

months by some port and groups. To even out the

usage.

• National Development and Reform Commisssion

(NDRC) has encouraged more quota to be released

in peak seasons to secure supply and stabilize

domestic price.

11

Additional rules to have a better control of the quota system:


Why the import control happened earlier this year than in previous years?

• Compared to 2017, import data in 2020 is more than 30% higher.

• With the impact of COVID-19, China needs to protect domestic industry (coal) and GDP.

12

China Import tonnages by month

（Unit: mt)

Jan Feb Mar Apr May Jun Sum YOY Total

2020 34,030,131 34,030,131 27,832,850 30,947,787 22,056,985 25,286,000 174,183,884 12.75%

2019 33,503,274 17,641,243 23,481,498 25,298,917 27,467,220 27,097,646 154,489,798 6.18%

2018 27,806,670 20,906,128 26,699,828 22,277,183 22,335,184 25,471,204 145,496,197 9.20% 280,780,852

2017 24,909,426 17,673,411 22,091,214 24,784,768 22,187,113 21,595,391 133,241,323 271,113,139

Source: IHS Markit


Timeline for China’s import controls

13

• Chinese customs dealt with surging clearance requests due to backlog cargoes from

November and December last year

• Some southern China ports flagged worries that they might run out of quota soon by

end-June, but have little idea of overall quota scheme this year

• By early April, Guangzhou customs halted clearance for some end-users in first

evidence of tightening policy

• Imports curbs escalated across multiple regions, after domestic miners lobbied for

more aggressive restriction against imports to protect their interest

• Some state owned utilities were warned of quota crunch on local levels and were

forced to delay or cancelled their shipments

• Customs authorities of Nanjing revoke import quota it issued in attempt to

reallocated permits

• Severe backlog built at China’s largest coking coal clearance hub

• Huangpu and Guangzhou customs declared crunch, seaborne inflows nearly came

to a halt

March-April

May

June-July


Chinese import prices have stabilised at current levels since beginning of June

14

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85,00

3,800kc NAR 4,700kc NAR 5,500kc NAR 6,000kc NAR

IHS Markit/Xinhua Infolink CFR prices into South China ($/t)

Source: IHS Markit, Xinhua Infolink © 2020 IHS Markit

Covid-19 Demand

destructionCNY

Quota

tightness


Chinese CFR prices

• Chinese CFR prices are down around 14-16%

year on year so far in 2020, depending on

grade

• They are down 23-31% for June/July 2020

compared to June/July 2019

> 3,800 kc NAR down 27%

> 4,700 kc NAR down 23%

> 5,500 kc NAR, down 24%

> 6,000 kc NAR down 31%

15

CFR prices into South China ($/t)

3,800 NAR 4,700 NAR 5,500 NAR 6,000 NAR

2019 42.63 58.03 65.64 81.54

2020 to date 36.02 49.59 57.07 70.06

June/July 2020 31.48 43.77 48.70 56.94

Source: IHS Markit/Xinhua Infolink


Chinese consumption has been rising since bottoming out in February - due to

CNY and the COVID-19 outbreak

16

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Combined power plant inventory Combined daily coal consumption

Power station coal stocks vs consumption (mt)

Co

nsu

mp

tio

n

Sto

cks

Source: IHS Markit, Xinhua Infolink © 2020 IHS Markit

Chinese New Year


• The NDRC held a closed-door meeting on 9 June concluded that importing activity is not a priority.

• The current domestic price surge was not mainly attribute to the control of import.

• Multiple measures would be taken to stabilize the domestic price.

> Encourage domestic production

> Coastal power groups stopped updating their consumption and stock data to give more flexibility for the end users

to control their stock level and increase their barging power in the domestic market.

> Encourage the performance of term contact while spot prices went higher than term contract.

> More import quota could be given in the peak period when there is shortage of domestic supply.

17

Domestic prices have risen but relaxation of import controls are unlikely to be soon


OutlookNear-term Indonesian FOB prices, forecasts and forward curves

18


Indonesian low-rank and sub-bituminous prices and outlook

19

The forecast is lagging behind forward curve – which moved higher over the past few days while the forecast is updated quarterly

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4,200 GAR FOB (M42) M42 forward price IHS Markit forecast

Indonesian 4,200 kc GAR FOB (M42)


$/t

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4,700 kc NAR FOB (M50) M50 forward curve (implied) IHS Markit forecast

Indonesian 4,700 kc NAR FOB (M50)


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AppendixIHS Markit’s Indonesian coal price Indices

22


IHS Markit has a long history of Indonesian price reporting

• IHS purchased the McCloskey Group toward the end of 2007, and IHS and Markit merged in mid-2016 to form IHS Markit.

• The McCloskey Coal Report has been publishing Indonesian subbituminous prices since the early 2000s, first formalizing it into a monthly

number around the mid 2000s and then going weekly in the second half of 2007. The index was developed further in 2010, in line with

becoming listed as the first exchange-tradable Indonesian coal derivative/swap.

• IHS Markit McCloskey has been producing indices for other Indonesian grades since April 2011. The full suite on Indonesian “M” numbers

includes

– 3,400 kcal GAR (Jan 2018)—M34

– 3,800 kcal GAR (Aug 2012)—M38

– 4,200 kcal GAR (Apr 2011)—M42

– 4,700 kcal NAR (Jan 2002)—M50

– 5,500 kcal NAR (Mar 2011)—M58

– 6,000 kcal NAR (Apr 2011)—M63

23


M50: An established index with more than 15 years of history

24

The McCloskey Coal Report has

been publishing Indonesian

subbituminous prices since the early

2000s

Formalization of IHS McCloskey

Indonesian Sub-Bituminous FOB

Marker into a monthly number

Early 2000s Mid-2000s 2007

The marker transitions into a

weekly number the second half

of the year

2010

Index developed further, listed as

the first exchange-tradable

Indonesian coal derivative/swap

2011–15

Popularity grows, trades around

18 metric tons per year at its peak

2015

Decline of the derivatives trading, along with a change to import

specifications into India and China, led to a decline in

subbituminous hedging active

Index also used as the basis of the FISTA contract for

physical delivery, gained popularity with a number of

international traders

2016

The basis calorific value (CV) of the contract was lowered, in line with

the market trend, from 4,900 kcal NAR to the more actively traded

4,700 kcal NAR, which helped increase number of trades captured in

formulating the weekly index

2018

With the launch of M42 as a derivative on SGX in

April 2018, the Indonesian Sub-Bituminous FOB

Marker was rebranded M50



25

What makes M42 and M50 different?

Transaction-based Predictability Transparency Fair and compliant

Trades are better than opinion in terms

of price discovery.

M42 and M50 are typically 75% trade

data backed

Participants need to be able to trust that

if they see the market rising, or falling,

that this is reflected in what we are

reporting and the final outcome of the

index

Provides feedback to the market on

what is being seen over the week

Index should reflect a fair price for both

buyer and seller; this allows for more

reliable premiums/discounts to be

applied

The M series of indices is designed to

allow trades and firm bids and offers to

take precedence over survey/opinion

Tracks the direction and momentum of

the market with minimum lag

No “black-box”—clear reporting on what

is included in the index calculation

IOSCO and BMR compliant, the

international standards for PRA-derived

commodity indices

Audited—methodology documents are

meaningless unless there is external

oversight to make sure they are strictly

applied


The IHS Markit coal reporting unit completed its fifth annual IOSCO audit by PWC in fourth quarter 2019, all of which have included M50 and included M42 being

tested for the second year to the “reasonable assurance” level.

China in Focus...Confidential. © 2020 IHS Markit®.All rights reserved. Long-term seaborne demand: peak demand has already occurred 6 0,0 200,0 400,0 600,0 800,0 1000,0

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