China's thermal coal futures rallied to a record high on Friday, lifting September futures to a premium over October, as a prolonged hot spell spurred power demand and low water levels dented hopes of higher hydro output, said three industry sources.
The buying lifted futures for delivery in September to a premium of 6 yuan ($0.88) per tonne over October, in a structure known as a backwardation, when prompt prices are higher than those for later months, that reflects tightening supplies.
At the start of the month, the spread had been in a 4-yuan contango.
The new curve suggests a brighter outlook for prices of the fuel most used to generate power in China even as Beijing has tried to boost supplies to avoid another crunch in supply that triggered a historic rally in prices last year.
Data earlier this week showed miners in May produced coal at their fastest pace in years ahead of peak summer demand.
"Price rally has been mainly driven by higher demand," said Wang Fei, coal analyst at Huaan Futures. "We are seeing utilities buying more coal from major ports and falling stocks at ports."
The most-active domestic thermal coal prices have risen 39 percent this year, reaching a record high on Friday of 580.8 yuan ($85.29) per tonne. Open interest also hit a record on Tuesday, reflecting bullish sentiment.
Prompt coal prices for cargoes from Australia
's Newcastle export terminal, Asia
's benchmark, have shot up 18 percent since mid-May to $84 per tonne.
Temperatures in northern China have been higher than usual since May, raising residential air conditioning use and spurring coal-fired power demand while hydropower generation in the south, the nation's second-largest power supply, has fallen due to low reservoir levels.
Total daily consumption from six of the largest coal power plants rose to 622,400 tonnes per day by June 16, up from 592,000 tonnes a month ago, according to China Sublime
A coal futures trader in Beijing said he had expected hydropower to help replace coal over the summer once the rainy season in the south replenished reservoir levels.
"But in recent weeks, we look at extremely low reservoir levels and think hydro output for summer won't be good and enough to replace coal power," he said.
Total inventory at utilities dropped 560,000 tonnes in June to 13.9 million tonnes, equivalent to 19 days of use, according to China Sublime.
While that is considered a healthy inventory, falling supplies at ports suggests power companies have continued to boost buying to replenish stockpiles.
Inventories at major coal port Qinghuadao fell to 5.33 million tonnes from 5.8 million tonnes at the beginning at June, the port's data showed. ($1 = 6.8100 Chinese yuan renminbi)
Reporting by Meng Meng and Josephine Mason