China: Thermal coal challenges to be less severe in 2022

In 2021, China saw a thermal coal supply crisis which plunged the country into a power crisis. In 2022, the challenges would be less severe but similar and the road ahead will depend on supply and demand dynamics play out.

On the supply side, the options are:

• Enhancing domestic production capacity in thermal coal;
• Imports to narrow the supply-demand gap.

Demand

But there is a need to analyse the demand aspects as well.

Electricity demand is a significant indicator of the demand for thermal coal since thermal power dominates electricity generation. In 2021, electricity consumption saw a rise of 10.3% as compared to 2020.

However, Chinese yo-y power demand growth in 2022 is expected to be lower than in 2021’s basedon the following indicators:

• Chinese economic growth momentum is slowing down.
• The leading indicator of the economy, the domestic PMI index, has fallen for consecutive months.
• Implementation of a dual control policy on energy consumption.
• Due to dual control and real estate downturn, the growth rate of the cement industry — a high-energy-consuming sector –.in 2022 will be flat or slightly reduced y-o-y.

The “dual control” policy has been introduced by the Chinese government to reduce energy intensity and to limit total energy consumption.

Supply

China has seen an increase in domestic coal production capacity but this is predominantly thermal. It is expected that a total of 460 million tonnes (mnt) of new production capacity will be added in 2021 in which the share of thermal coal will be more than 80%. But, at the end of 2022, coal production capacity will reduce by 140 mnt as compared to 2021.

Imports

China requires imported coal but this will not come from Australia. China is importing thermal coal from Russia, Indonesia and South Africa.

However, as a policy, China will rely on domestic coal supply and  curtail imports. Thus, the annual import volume in 2022 may not exceed thatof 2021. In 2021,  coal imports were at 323 mnt, a y-o-y increase of 6.6%.

Outlook

In 2022, the thermal coal price mechanism would be the “base price + floating price”. Growth in thermal coal demand will drop, and the total volume of imported coal may continue to be controlled. It is expected that the balance between thermal coal supply and demand will significantly improve, which could pressure prices to move down y-o-y.