Amidst the constrained coal supply situation in China since the start of the year due to the ban on Australian coal, Chinese power utilities have preponed their coal restocking for the winter season a month earlier starting from Sept’21.
But the biggest challenge being faced by these units is the multi-year high imported thermal coal prices and rapidly depleting coal stock.
As per market reports, China’s coal-based power producers, which account for more than 70% of the country’s electricity generation, are unable to buy enough fuel following the surge in prices in the last few months.
In fact, several power utilities in the country have been either operating at losses or have suspended their operations to save cost as procuring coal has become unviable.
The worsened coal supply situation in China
During the summer season, Chinese power plants began facing a severe supply shortage as stringent safety measures at mines following some fatal accidents resulted in lower coal output in the country.
Heavy floods during July further disrupted mining operations at major coal producing provinces and also transportation of coal, forcing companies to use electricity judiciously and cut down consumption.
While the situation improved a bit from mid-Aug, heavy rainfall in Indonesia from 10 Sept’21 and congestion at Chinese ports due to Covid quarantine measures, resulted in a sharp decline in cargo availability, thereby leading to many Indonesian miners cancelling their shipments.
Now, amid a supply crunch in imported coal coming from Indonesia and the restrictions on domestic coal supplies in China due to safety inspections, few power utilities are even heard to be left with only one week’s coal stock, making them buy thermal coal even at all-time high freight and coal costs.
Domestic price for the 5,500 NAR thermal coal in China has moved up by 55% since Jan’21 and is currently being traded at RMB 1,400-1,500/t ($215-230/t) whereas the imported thermal coal price from Indonesia is comparatively cheaper by $40-50/t against the imported coal prices.
In the run-up to the winter months, when electricity consumption rises sharply due to cold weather, market participants are again worried about facing a similar situation.
Steps to improve domestic coal supplies
The Chinese government has aimed to add almost 110 mn t/year of coal production capacity in H2CY’21 to meet the rising demand.
The state planner, National Development and Reform Commission, has extended the trial operations of 15 mines with a combined annual production capacity of 43.5 mn t for another year.
It has also instructed coal mines and the transport department to sign medium to long term contracts with power and heat producers in China’s three north-eastern provinces to ensure coal consumption supply is 100% covered.
However, these efforts by NDRC to increase domestic coal production are facing environmental hurdles. The National Energy Administration has said that it plans to strengthen its oversight of the energy and environmental sectors in response to government criticism. It has also published a “rectification plan” this month designed to help it comply more closely with government policies, following criticism from an environment ministry inspection team that it was prioritising output growth over emissions reductions.
Subsequently, market experts believe that these steps are not enough to push the domestic coal supplies and meet the escalated coal demand of the country during winter.
Way ahead?
Amid the already constrained global thermal coal supply and rallying prices, the current coal restocking demand for winter in China is likely to send thermal coal prices even higher in the coming months.
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