A recent field survey conducted by a futures research team across Shanxi province has revealed a notably tense coking coal supply environment, with spot market sentiment running exceptionally hot and the first round of coke price hikes quickly taking effect. To understand the underlying factors driving this resource squeeze and whether Shanxi's coking coal supply landscape is genuinely shifting, we visited Changzhi City and Taiyuan City (Qingxu County), engaging with five industrial entities, including one coal mine, two coal washing plants, and two coking facilities.

Shanxi coking coal market sentiment runs high

The most immediate observation from our trip was the visibly tight availability of coking coal resources across Shanxi. Both midstream washing plants and downstream coking facilities reported sharp increases in the latest auction prices for various coal grades, with limited auction volumes and no guaranteed delivery timelines. While the core price surge is concentrated in main coking coal and lean coking coal, the sustained low production levels at coking coal mines are driving catch-up price gains across all coal types, although the Changzhi lean washed coal, which faces a shortage of supply, appears to be seeing comparatively smaller increases.

Shanxi coking coal output recovery still pending

The production cuts are primarily concentrated in Changzhi City and the surrounding Jinzhong area, regions previously affected by major safety accidents. The coal mine we visited, located in Changzhi City, was not directly halted but has still reduced output by around 30%. This operation is prioritizing long-term contract customers, while smaller and medium-sized clients have had shipments suspended. We also learned that a few scattered mines in Shanxi have recently suspended operations due to output management issues, with some cases spreading from coking coal mines to thermal coal mines, indicating that local safety inspections and overproduction crackdowns remain stringent. Although local authorities are actively promoting orderly复工复产, smaller mines, especially private underground operations, still face challenges in meeting full safety and environmental standards, making it difficult for them to pass comprehensive inspections. Regarding capacity expansion approvals, there is no clear policy direction at present, and even if approved, it would take nearly six months to equip and stabilize production. Based on our field research, unless higher-level policy changes occur, Shanxi's low coal output situation is likely to persist. The province's special rectification campaign targeting "three over" practices and concealed working faces in 2024 lasted about six months, which serves as a useful reference for timing.

Downstream coking plants and steel mills have limited capacity to absorb price hikes

The coking plants we surveyed all indicated that coking enterprises in Shanxi have essentially fallen into a state of comprehensive losses. Aside from a few companies that had stocked up on raw materials early and managed costs effectively, most stamp-charged coke producers are hovering at breakeven even after the first round of price increases, while top-charged coke producers are losing at least 100-150 yuan per ton. Consequently, coking enterprises across Shanxi have implemented production cuts ranging from 20% to 40%. Local steel mills in Shanxi have also long since initiated maintenance-related production cuts and are resistant to accepting higher coke prices. However, steel mills outside the province, particularly in the south where profitability remains decent, are still scrambling to purchase coking coal at elevated prices due to longer procurement and shipping lead times. Regarding coal charge inventories, the two coking plants we visited are relatively well-supplied locally, with 12-20 days of coal charge on hand. But many other coking plants, particularly those relying on outsourced supply, have seen their coal charge days fall to low levels, which is a key reason why several local coking enterprises have decisively reduced output amid surging coal charge costs. In essence, the "buffer" role that coking plants can play in this coking coal price rally has been stretched to its limit. Going forward, coking plants will need to expand production cuts to force steel mills to accept all increases in coal charge costs, leading to a direct showdown between downstream steel mills and coal charge suppliers.

Hidden stockpiles depleting while trading demand weakens

A critical factor we sought to verify during this field survey was the real-time status of hidden coking coal inventories in Shanxi. To this end, we visited two of the few coal washing plants still operating in Changzhi City. Both plants corroborated each other's accounts: after the Spring Festival, total coal inventories peaked at around 200,000 tons, but have now been nearly cleared as they continuously arranged shipments to long-term contract customers. The subsequent surge in raw coal auction prices has left these washing plants unable to afford replenishing supplies. Based on feedback from these two washing plants and the coal mine we visited, hidden inventories in Changzhi City are indeed close to "drying up," with the mine itself operating with near-zero inventory. Outside Changzhi, some washing plants and warehouses in other regions still hold stockpiles of raw coal awaiting gradual release. However, it is now clear that at current high auction prices, no intermediary inventory holders are participating in procurement, reflecting a degree of "fear of heights" in the trading market. Yet, given the low auction failure rate, end-user buying enthusiasm remains robust. Of course, low supply is the fundamental driver, and the intermediary "reservoir" has shifted to a state of minimal inflow and reduced outflow.

Survey conclusions

In summary, our field trip to Shanxi has reinforced our expectation of sustained low coking coal supply, with the intermediate trading segment undergoing structural inventory depletion. The coking coal market has turned into a direct "head-to-head" standoff between steel mills and mining companies. Since downstream coking plants are indeed operating at a loss under full-cost accounting, and our estimated steel mill profits are also razor-thin, while domestic coking coal supply issues remain unresolved for now, we anticipate further cuts in hot metal production ahead. This could lead to a resonance-style rally where both steel prices and coal prices rise together, until hot metal output drops to a new crude steel supply-demand balance. Beyond domestic coking coal, the persistently low clearance rates at the Mongolian border are also a market focus. The reasons for the low throughput are widely debated, but the situation has persisted for over a week, undoubtedly adding upward pressure to an already tight main coking coal supply. As a result, seaborne coal is stepping in to provide incremental supply, with its prices quickly catching up. The current futures price corresponds to the delivery certificate price of imported second-tier main coking coal. However, the scale of seaborne coal supplementation is clearly insufficient, and the key variable for future coking coal supply remains Mongolian border clearance levels. Our directional outlook for coking coal and coke futures prices remains upward, but compared to the earlier expectation of a violent correction to close the basis discount, the subsequent rally is likely to be more volatile and subject to fluctuations tied to downstream hot metal production changes.