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China coal traders bet on shortages as spring temperatures soar

Beijing

CHINA'S thermal coal futures rose to a six-week high on Wednesday as traders bet on a supply crunch as lower hydro power output and forecasts of a summer heat wave spurred expectations of rising demand for the nation's most-consumed fuel source.

The most-active futures, for September delivery, on the Zhengzhou Commodity Exchange rose by as much as 1.9 per cent to 643 yuan (S$135) per tonne on Wednesday, their highest since Feb 28. They have rallied 16 per cent since mid-April.

Demand has risen as coal-fired power plants will need to shore up inventory over the coming weeks as households in the southern pro-vinces of Anhui and Fujian and in major cities like Beijing and Shanghai crank up air conditioners due to warmer than usual spring temperatures.

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"Tightness in the coal market is coming back. In northern China, anti-pollution campaigns have curbed production and shortages have emerged in parts of southern China," a Zhengzhou-based thermal coal futures trader said.

Demand across Asia, including China, has also boosted the price for coal from Australia's Newcastle port, the regional benchmark, to over US$105 a tonne, the highest in five years for this time of year.

Temperatures in the city of Fuzhou in Fujian province and Shanghai rose to a higher than normal 37 degrees Celsius this week.

Weather data on Thomson Reuters Eikon forecasts China's largest cities, Beijing and Shanghai, will experience a hotter than usual summer this year.

Reflecting the jump in bullish bets, open interest, a measure of liquidity, has risen since mid-April to over 402,292 lots, equivalent to 40.2 million tonnes of coal, on Monday, the highest since Feb 5.

Higher coal prices would crimp profits at China's utilities that have already struggled with rising prices over the past two years as government-enforced mining cuts have limited supply.

Rising coal demand runs counter to Beijing's long-stated aim to boost renewable power consumption to reduce air pollution. Coal accounts for two-thirds of China's power generation.

Wang Fei, a coal analyst with Hua'an Futures, predicted that coal futures could rise to as high as 690 yuan per tonne in June, surpassing the record of 680 yuan in January, as utilities shore up supplies before the peak summer demand period.

The six largest coal power plants on the coast had 19 days of inventory by May 11, down from more than 20 days around the same period last year, data provided by Hua'an Futures showed.

"Utilities started stockpiling earlier than usual this year, but it is not enough. The pace of stockpiling will accelerate in late May as power plants bring their inventory to a relative high level before summer," Mr Wang said.

Plants are also restocking as concerns grow about a customs crackdown on imports in the eastern provinces of Zhejiang, Guangxi and Fujian, which have limited arrivals of foreign coal.

Adding to concerns about the early heat wave are low reservoir levels, limiting hydro power output.

Data on Tuesday showed that volumes at major reservoirs have fallen for six consecutive months since December and are at their lowest since August. Reservoir levels are a key gauge of how much electricity can be produced by hydro power stations.

"We are closely watching if hydro power is enough to support overall power generation," said the Zhengzhou-based trader.

Hydro power output fell to 65.05 billion kilowatt hours (kWh) in March, the second-lowest ever for data going back for three years, and rebounded to only 70.2 billion kWh in April. REUTERS