SunSirs: Bullish Factors Persist; Limited Downside for Chinese Coking Coal

According to Sina Finance, early June saw coking coal futures surge—with the 2609 contract briefly approaching the 1,500 RMB/ton mark—driven by market expectations of tightening supply following a safety accident at a coal mine in Shanxi. However, market sentiment quickly reversed upon news that mines in the Qinyuan area of ​​Shanxi were resuming operations; the 2609 contract subsequently closed lower for several consecutive days, with prices gradually retreating to a low range near 1,250 RMB/ton.

Following a concentrated release of bearish sentiment in the coking coal market, many traders began to worry that the resumption of supply would continue to suppress prices. Yet, when considering factors such as the pace of production resumption at domestic source regions and potential disruptions to coal imports, there is insufficient momentum for a further deep decline in futures prices; instead, coking coal futures are likely to enter a phase of range-bound fluctuation at low levels.

The recent sharp pullback in coking coal futures prices was primarily driven by the market "pricing in" the expectation of supply recovery—interpreting the resumption of operations at certain Shanxi mines as a signal that the supply gap would rapidly close. However, actual industry conditions reveal that while some mines have passed inspections and resumed operations, their actual output remains constrained. Strict safety regulations govern the entire process—from extraction and washing to transportation—making it difficult for mines that have resumed operations to reach full capacity. Safety inspections across Shanxi remain rigorous. Data from Fenwei’s research indicates that as of late June, 46 coking coal mines across five Shanxi cities remained shut down. In Qinyuan County, Changzhi, only one mine has completed the resumption process and restarted extraction; even this mine experiences significant daily output fluctuations and lacks production stability, while the resumption inspection processes for other mines in the region have been completely suspended. At the policy level, the National Development and Reform Commission (NDRC) explicitly called for "balancing safe production with stable supply" during a June briefing on energy supply, emphasizing that ensuring supply must be predicated on strict adherence to safety standards. This implies that production paces at mines that have resumed operations will remain controlled. Overall, while there is a trend toward resuming operations at Shanxi coal mines, the actual release of production capacity remains limited. Given the resilience of spot prices, there is limited room for further downward adjustment in coking coal futures prices. Since May 22, the price of Shanxi prime coking coal has risen by 400–500 yuan/tonne, whereas the maximum increase for "Meng-5" coking coal was only around 200 yuan/tonne; this highlights a clear divergence within the coking coal market, with Shanxi coal showing relative strength and Mongolian coal showing relative weakness. The core reason for this divergence is a significant contraction in Shanxi coking coal production, contrasted with consistently high import volumes and elevated port inventories for Mongolian coal. As coking coal futures contracts are primarily pegged to "Meng-5" coal, an arbitrage strategy has emerged within the industry: going long on Shanxi spot coal while shorting futures. However, with futures prices continuing to decline, the basis (spot-futures spread) has widened to 100 yuan/tonne; futures valuations are now at low levels, significantly narrowing the scope for further short positions. Meanwhile, as a crucial supplementary source of domestic supply, Mongolian coal imports face potential disruption. Mongolia’s Naadam Festival in July will see border crossings closed for five days, leading to a temporary contraction in import volumes. Beyond holiday-related disruptions, persistent labor and wage disputes at local Mongolian mines pose further risks; the Confederation of Mongolian Energy, Geology and Mining Trade Unions recently decided to organize a strike across the entire energy sector starting at 8:00 AM on July 2, which is expected to impact coking coal shipments.

Regarding downstream demand, although the market has entered the traditional off-season for steel consumption—with weakening finished steel prices squeezing steel mill profits—daily average hot metal output remains stable at a high level exceeding 2.4 million tons, and essential downstream procurement has not shown significant contraction. The ninth round of coke price hikes has been fully implemented, and the market strongly anticipates a tenth round. To ensure production continuity and stable coke supplies, coking enterprises will continue their essential procurement of coking coal feedstock. Should coking coal futures prices continue to fall, the willingness of industry players and traders to stockpile at lower prices would likely surge, effectively absorbing selling pressure from short positions in the futures market.

In summary, the recent consecutive pullbacks in the coking coal 2609 contract price have fully priced in expectations for the resumption of production at Shanxi mines; following the concentrated release of bearish sentiment, there is a lack of new drivers to push prices lower. The pace of production resumption at domestic coal mines remains sluggish. Compounding this, Mongolian coal imports face an impending suspension due to the Naadam Festival, while potential strike risks threaten to disrupt import growth; consequently, the coking coal supply side is unlikely to see a sustained easing of constraints. Meanwhile, high levels of downstream hot metal output underpin inelastic procurement demand, and the spread between futures and spot prices provides a floor for valuations. In the short term, the market is likely to shift from a one-way downward trend to a pattern of range-bound fluctuation at low levels. Blindly chasing the downside carries significant risk; a better strategy may be to wait for prices to stabilize before positioning for a potential market correction.

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