Abstract: Officials from the National Development and Reform Commission (NDRC) have issued instructions for the next steps: 1. Increase production and supply; 2. Stabilize coal prices; 3. Control the pace of coal imports; 4. Organize coal transportation effectively; 5. Conduct effective public awareness campaigns; 6. Strengthen power grid dispatch and operation; 7. Enhance monitoring and analysis.

The main thermal coal futures contract, ZC2105, experienced a one-sided downward trend starting Tuesday night, and twice hit the daily limit down on Wednesday afternoon, ultimately closing at 689.8 yuan/ton, down 42.0 yuan/ton, a decrease of 5.74%. The ZC2105 contract saw a total trading volume of 1,059,148 lots, the highest since January 13th; open interest decreased by 65,705 lots to 179,629 lots, the lowest since January 5th.

"The sharp correction in thermal coal futures on Wednesday was mainly due to a cautious sentiment spreading after a rapid rise in coal prices during the off-season. Long positions quickly exited the market starting Tuesday night, coupled with concerns about rumored regulatory policies, leading to a widening decline during the daytime session, with a 5.74% drop for the day," said Zhang Xiaojin, senior thermal coal analyst at Everbright Futures.

According to sources familiar with the matter, on the morning of April 7th, the National Development and Reform Commission convened a meeting with the Coal Department of the National Energy Administration, the Freight Department of China State Railway Group, various central state-owned power groups, Shenhua Group, China Coal Group, Qinhuangdao Port, and representatives from the building materials, steel, chemical, coal, and power associations.

Power companies all stated that the price of coal delivered to their plants in the first quarter was extremely high (averaging over 760 yuan/ton), current inventory is low, and daily consumption is high (less than 7 days of coal were available at the end of March). They urgently need to stock up on coal for the summer in April and May. They suggested establishing a stable import coal quota system.

According to major domestic coal companies, first-quarter production increased by 15% year-on-year. They suggested abolishing the daily spot price index and directly publishing a weekly index. It is also suggested that coal mines that increase production during the supply guarantee period should be considered separately in the annual total output calculation.

Relevant officials from the National Development and Reform Commission (NDRC) have given instructions for the next steps: First, increase production and supply. Organize coal mine production according to the highest winter output and set targets for each mine. Second, stabilize coal prices. Leverage the role of long-term contracts as a stabilizing force and prohibit following the trend of price increases. Third, control the pace of imported coal to serve the domestic economy. Fourth, organize coal transportation effectively, especially during the maintenance period of the Daqin Railway, and quickly increase the stockpile at Qinhuangdao Port to over 5 million tons. Fifth, conduct effective publicity and guidance on market expectations. Sixth, strengthen power grid dispatch and operation, and optimize the power generation structure (increase non-coal power generation). Seventh, strengthen monitoring and analysis; all enterprises should establish a daily meeting system, and important data and information should be reported to the operation bureau in a timely manner.

Wang Xiaonan, a senior analyst of thermal coal at Baocheng Futures, believes that the previous strong rise in thermal coal prices was mainly supported by tightening supply. Increased safety inspections, the maintenance of the Daqin Railway, and limited replenishment of imported coal have led to expectations of tighter supply, resulting in successive increases in pithead and port prices. However, we are currently in the traditional off-season for thermal coal demand. Faced with the continued price increases, downstream enterprises have shown passive resistance to high prices, and cement companies have previously stated that they find it difficult to accept high coal prices. Recently, the number of ships anchored at ports around the Bohai Sea has declined significantly, lacking demand support, limiting the upward momentum of port quotations. From the supply side, around the Qingming Festival, some coal mines have already lowered prices, and expectations of policy intervention are increasing.

"The National Development and Reform Commission held a meeting and stated that it requires coal mines to organize production according to the highest winter output. If we consider the monthly output of 350 million tons from the end of December 2020 to January 2020, it can basically meet the demand growth. After the recent sharp rise in domestic coal prices, the price advantage of imports has been restored, and the medium-term demand for foreign trade coal is expected to increase. In addition, in terms of transportation, it is also required to actively organize transportation and increase the coal inventory level at Qinhuangdao Port. Although the maintenance of the Daqin Railway started as scheduled, market feedback shows that the impact of the first day of maintenance on the transport volume was relatively limited," said Wang Xiaonan.

Lan Tianxiang, a senior researcher at Yingda Futures, believes there are three reasons for the sharp decline in thermal coal futures prices: First, the liberalization of coal management permits in early April improved the market coal supply situation, and expectations are expected to be stronger, as the government is using market-based means to promote the steady development of the coal market. Second, the upcoming March coal import data may show improvement; given the significant decline in imports in January and February, March coal imports may increase. Third, the main thermal coal contract will shift from the ZC2105 contract to the ZC2109 contract. With both spot and futures prices at high levels, long positions can easily lock in expected selling prices by selling futures; at the same time, the relatively smaller decline in the forward contract is more conducive to the long positions shifting.

Zhang Xiaojin told reporters that the domestic quota and import increase still need to be observed. According to the meeting, "coal mine production will be organized according to the highest winter output, and quotas will be set for each coal mine." The extent of supply recovery needs to be observed. Whether past restrictions can be completely lifted and to what extent production can be increased are key factors in where coal prices will stop falling in the future. In addition, regarding imports, cumulative imports in January and February totaled 41 million tons, a year-on-year decrease of 39%. Currently, Indonesian coal prices are at a high level, and production will be restricted in April as Indonesia enters Ramadan. Australia has had zero customs clearance from December last year to February this year, making it difficult to fill the gap in high-quality coal imports through other channels. At present, it seems difficult to increase imports in the future, and further policy details remain to be seen.

An industry insider told reporters that significantly better daily consumption than the same period in history after the Spring Festival is the biggest support for this round of coal price increases. Even compared with 2019, there is a 5%-8% increase. April is traditionally a low season for coal consumption, but current terminal inventories are low. The current excessively high coal prices have reduced the willingness of end-users to purchase, but as time goes on, the demand for restocking still exists, which is conducive to stabilizing coal prices.

Zhang Xiaojin believes that northern ports have already shown cautious sentiment during the Qingming Festival holiday, with some traders gradually shipping goods. Wednesday's sharp drop in futures prices will affect short-term port transaction prices and volumes. In the next few days, it is necessary to release pessimistic sentiment. After this sentiment is released, the key will be how much supply increases. The direction of the market in the next two days is crucial. For now, the main futures price is expected to find support in the previously densely traded area of 630-650 yuan/ton. In the medium term, the focus remains on the increase in supply and the pace of end-user restocking. Currently, the outlook for hydropower is not optimistic, and meeting demand still depends on domestic supply. There is no basis for a significant drop in coal prices at the current juncture.

Wang Xiaonan believes that increased supply expectations coupled with the off-season for demand have cooled market bullish expectations, causing futures prices to have already reached a turning point. In the short term, prices may continue to fluctuate downwards. However, since the end of March, many provinces have issued notices regarding large-scale safety inspections, and the pressure of security checks in production areas remains significant. Furthermore, downstream power plants have low inventory levels and still have purchasing support before the peak demand season. Combined with the influence of the near-month contract's futures-spot linkage, the downside potential of futures prices should be treated with caution, with support at 650-670 yuan/ton.