Some views on the current Chinese coal market

Since the beginning of summer, many friends have said that they don’t understand this year’s Chinese coal market. It should not rise when it should rise, and it should not fall when it should fall. Moreover, the price change cycle is extremely short and has no directionality. So I don’t know when to buy coal, when to sell coal, and when to store coal.

This feeling is real, but the basis of understanding that causes this feeling is based on changes in market supply and demand. Because in the past few decades, people have formed a fixed understanding of the supply and demand changes in the Chinese coal market, which is what people call the regularity. Therefore, when the market does not change according to people’s inherent understanding, they naturally feel that I don't understand.

Why this year's China coal market will deviate from the laws of previous years and change?

The main reason is financial intervention.

The involvement of finance is manifested in three aspects:

1. The rise of e-commerce platforms.

2. The massive entry of pallet funds.

3. The booming futures market.

The e-commerce platform can play its role in information communication. This is also its most important role, but the e-commerce platform that uses coal as a single commodity is absolutely impossible to get to the level of Jack Ma's Alibaba e-commerce platform. Because the nature of the commodities they operate is completely different. As a bulk cargo and an energy commodity, coal can only be used by groups, that is to say, it can only be used by production companies. Therefore, it is relatively simple in information communication, and the demand for information is relatively low. The reason why the National Development and Reform Commission vigorously promotes the long-term association is to further reduce the information demand of coal, reducing the information demand and reducing transaction costs.

In this case, although the main role of the coal e-commerce platform is in the communication of information, in fact its role is extremely limited. To play a role in the coal logistics industry chain, the e-commerce platform can only be combined with finance to solve the problem of the time difference between the capital flow between coal production enterprises and coal consumption enterprises. Coal is a bulk cargo, and the circulation of its funds is extremely huge, and it cannot be easily obtained. However, if the e-commerce platform really solves the financing problem, it will inevitably derive a new function to become a real buyer and seller of coal. The parent companies of these e-commerce platforms are all large coal traders. One thing can prove this. If they develop smoothly, these e-commerce platforms will eventually become companies of the nature of market dealers in the stock market.

However, an insurmountable shortcoming of these e-commerce platforms is that they cannot solve the railway transportation problem. Since the railway transportation problem cannot be solved, they cannot smoothly control the supply of goods from the source. They can only carry out capital pallets at ports or other coal distribution centers to control the supply of goods. In the case of other pallet funds entering the market, these e-commerce platforms can only control part of the supply.

In previous years, pallet funds have also entered the coastal coal market. These pallet funds are some large companies that intervene in the coal business in order to increase the flow of funds on the accounting books. They are often partial and temporary. However, most of this year's pallet funds are comprehensive long-term involvement in coal business. Where these funds come from, what scale, structure, and nature are unknown, but their existence is an indisputable fact. An obvious fact is that the port has piles of coal, but a ship of about 50,000 tons is required. But it is quite difficult. Each of these coals has its own owners, but each is small in size and cannot be loaded on a single ship. And there is a very strange phenomenon that the willingness to ship goods is not strong, and it seems that they are not in a hurry to empty the inventory in their hands. Eventually, the port operating companies adopted the method of not ordering the coal entry menu without shipping schedule to force these cargo owners with coal in their hands to empty their stacks.

Why don't these people with coal in their hands clear out their inventory as soon as possible? What are they expecting?

They are looking forward to changes in the coal futures market of ZCE.

In the early days of ZCE’s coal futures, people were not enthusiastic about participating. The initial participants were mostly people who had nothing but money and were not in the coal business. So the gap between futures and spot is very outrageous. However, since this year, futures have had a direct impact on the spot market, and even the spot market has become the mode of operation of the spot market following futures. Why do these changes occur? Because after several years of operation, many people have understood the secrets of the operation of coal futures, especially many companies in the industry, whether coal production companies, coal dealers, or coal users have already seen the doorway of coal futures. After the sledgehammer, there is a preliminary practical experience, so it can be a big deal. The intervention of these powerful companies has also led to the participation of countless retail investors, which has led to the hot coal futures market this year and the news.

Since the futures market can make a profit in the long-short game, if it is combined with the spot market, the profit-making space can be doubled. The operators who can play the game of day-volume long-short in the futures market must be those who hold a large amount of cash in the spot market. The use of futures to control the spot, and the use of spot to promote futures, mutual turbulence and mutual protection, formed a spectacular picture of China's coal market in 2018.

This also shows that due to the intervention of the above three financial forces, the nature of China's coal market, especially the coastal coal market, has changed, and it has evolved from a physical market that guarantees supply to a financial speculative market. Although financial speculation cannot be completely separated from the basic supply and demand side, under the conditions of electronic trading, it can change the direction of long and short in a very short time, thus making the spot market uncomfortable. Nowadays, many market analyses based on supply and demand can no longer provide proper guidance for market operations.

Recently, "Economic Observer" has opened up Professor Chen Zhiwu's financial class column, in which a lesson on futures, made an easy-to-understand, concise and profound analysis of the futures market. Professor Chen Zhiwu pointed out: The essence of futures is to stabilize the enterprise Expectations. However, in order to ensure their stable operation, enterprises will inevitably pay a price, which is the profit space formed by future market price changes. The futures market must allow speculation. Without speculation, there will be no takers, and no futures trading can be achieved. So where is the room for speculators to profit? It is the profit space that the companies that lock in the future give up. But speculators can't replace the futures market to lock in the fundamentals of future expectations, and can't let the long-short fight become the fundamentals of the market. The coal futures of ZCE has just become such a situation this year. The reason is that the basic market for using the futures market to lock in future expectations is too small. Most coal production companies, especially coal consumption companies, have not participated in the futures market. Taking the 1901 contract for thermal coal from the Zhengzhou Commercial Exchange as an example, there are only 330,000 lots in total. Calculated by 100 tons per lot, the total amount is only 33 million tons, which is less than 1/10 of China's monthly coal consumption.

There may be three reasons why our large companies do not participate in the futures market:

One is the lack of basic knowledge of the futures market, and I don't know what the futures are like, so it is impossible to participate.

The second is the management system. The futures market is risky. Although it will not lose money, it is also a risk that the profit that can be obtained is transferred. No one is willing to bear this responsibility, so they are unwilling to participate.

The third is the long-term price guarantee, so there is no pressure and participation.

This third point, long-term price guarantee may be the main reason, especially for coal-using enterprises. The long-term association and the futures itself are opposed and contradictory. One stresses stability and the other stresses volatility. The coal market in the United States is basically a long-term agreement without futures. The current international agreement is also the annual long-term association, without futures. The existence of both long-term associations and futures is a phenomenon with Chinese characteristics and is worthy of in-depth study. How to combine the long-term association with futures should be the direction of the structural adjustment of the price formation mechanism of China's coal market in the future.

Because of the small participation of large companies, the scale of futures is small. Taking the thermal coal 1901 contract as an example, 330,000 lots, a coal price of 610 yuan per ton, a 20% guarantee, and a total margin of 4.026 billion yuan. That is to say, 4.026 billion yuan of funds can affect the price trend of more than 300 million tons of coal. And 4.026 billion yuan of funds is insignificant in China's capital market, so it is normal for China's coal market to fluctuate frequently this year.

Frequent fluctuations in China's coal market prices indicate excessive speculation in China's coal futures market. Necessary speculation can enable coal futures to fulfill its mission, but excessive speculation will destroy the basic functions of coal futures. Relevant state management departments have already been aware of this problem. With the large-scale financial supervision work launched this year to prevent comprehensive financial risks, the financial supervision of the coal market is also being carried out steadily and has achieved obvious results. The momentum of funds entering the coal market has been curbed, which has led to operational difficulties for certain e-commerce platforms and a situation of dumping inventories in the market.

It is often said that structure determines function, and financial supervision can suppress the flow of speculative funds, but this can only play a temporary role. Once the regulation is relaxed, speculative funds will be active again. Only by changing the structure of China's coal futures market can the excessive speculation in the coal futures market be fundamentally changed. In this regard, the world's crude oil futures market can serve as our best reference.

At present, the most influential oil futures in the world are Brent crude oil in the United Kingdom, West Texas oil in the United States, Abu Dhabi oil in the UAE, and oil futures in Shanghai, China. The main reason why these oil futures are not excessively speculative is that their scale is large enough, and the customers involved are both producers and oil users. The purpose of participating in futures is basically to stabilize expectations, so their price fluctuations are basically Based on changes in supply and demand, it is relatively stable and has a strong trend. Even if there is a change, the amplitude is small. Due to stability, the price of oil futures has become the basic basis and reference indicator for oil spot trading.

In contrast, we can see that the size of China's coal futures market is too small. One is that the target is small, and the other is that the scale of customers is small. Therefore, only a small amount of capital can form a long-air battle. To change this situation, the fundamental thing is to expand the scale of the coal futures market. The expansion of the scale is one to increase the transaction volume, and the other is to change the customer structure and increase the number of large customers. If all our large coal production companies, all large coal-using companies, including thermal power plants, large steel plants, and cement plants, can enter the futures market, China’s coal futures market will surely stabilize and be like the world today. The crude oil futures market also plays its role in the allocation of resources by the market.

Our management department should not just focus on the long-term price agreement, but should study how to use the futures market to solve the long-term price agreement. The biggest obstacle facing the long-term price agreement is the problem of railway transportation. This problem prevents the supply and demand parties from meeting directly, and secondly, many coal mines that should be included in the long-term agreement cannot enter the long-term agreement. Therefore, the proportion of Changxie Coal in coal-using enterprises is not high. Under such circumstances, the long-term association cannot guarantee the effective operation of the Chinese coal market.

This article is transferred from China Coal Network