Persistent weakness in China's northern port thermal coal market has pushed prices close to the cost floor, with early signs of stabilisation emerging, though a rebound remains premature.

Since mid-June, portside thermal coal prices have continued to decline. Data from Sxcoal shows that as of July 8, the CCI5500 index has fallen by a cumulative 62 yuan/t since the start of the downturn, approaching the key threshold.

As prices have fallen, some cargoes are nearing cost levels, prompting upstream suppliers to hold firm on offers and hoard stocks. Expectations of seasonal peak demand have also limited low-priced sales, narrowing the pace of declines.

On July 8, the CCI5500, CCI5000 and CCI4500 indices closed at 803 yuan/t, 710 yuan/t and 615 yuan/t FOB with VAT, respectively, down 5 yuan/t, 5 yuan/t and 2 yuan/t from the previous day, with the rate of decline narrowing.

Aside from cost support, improved inquiries have also bolstered traders' pricing power. Sxcoal learned that as prices fell, downstream inquiries increased, though mostly for speculative procurement, signalling a slight improvement in market sentiment.

However, market divergence persists. Some traders remain keen to sell, believing that weak demand will continue and that prices have yet to bottom out, leaving room for further declines.

For now, the market is caught between bullish and bearish factors. While the coal price floor may be near, a rebound is still premature.

First, supply from producing regions remains tight. Although outbound shipments have been hampered by negative margins and weak demand, inventories remain low overall. Sxcoal data shows that total thermal coal inventory at surveyed mines stood at 3.97 Mt during the July 2-8 period, up 96,000 tonnes from the prior period but still at low levels.

Second, negative shipping margins and tight port space have reduced rail deliveries, potentially lowering high inventories at northern ports. Sxcoal data shows that coal stocks at northern ports have held around 29 Mt, still elevated by historical standards but slightly down from earlier levels. With more vessels at anchor and reduced inbound volumes, port inventories are expected to continue declining.

Third, high temperatures have lifted power plant coal consumption. On July 8, coal consumption at the six major coastal power groups reached 828,000 tonnes, up 10.5% from the start of the month. Seasonal heat is expected to intensify.

Fourth, inventories at midstream and downstream remain high. While northern port stocks have edged down, they are still elevated, and stocks at Yangtze River and southern China ports are even higher. Power plant inventories are also at record levels. Data shows that on July 8, coal stocks at the six major coastal power groups rose 3.37% year on year. Some southern power plants have already secured coal coverage for the entire July-August summer season.

Fifth, hydropower output remains strong. According to the National Climate Center, precipitation in mid-July will be above normal in parts of east-central, northeast and south China, as well as southern southwest China and central-southern Xinjiang, boosting hydropower generation and displacing some coal-fired power demand.

Sixth, imported coal continues to provide effective supply. Spot cargoes remain ample. Despite firm offers from overseas miners, weak domestic demand and high inventories have kept import prices under pressure, with some coal grades regaining price advantages and supplementing coastal supply.

Seventh, typhoons are expected to curb near-term demand. The impact of Typhoon Maysak lingers, while Super Typhoon Bavi is set to make landfall in east China. The meteorological department forecasts two more typhoons in the northwest Pacific or South China Sea over the next 10 days (July 9-18). Heavy rain and strong winds are likely to limit coastal power plant coal consumption, and with high inventories, procurement enthusiasm may remain subdued.

In summary, near-term demand weakness is unlikely to change under the influence of typhoons. Even if speculative buying and cost support allow traders' offers to stabilise, whether a rebound will follow depends on changes in midstream inventories and power plant coal consumption.