China boosts coal output to offset lower gas imports, high prices

China has ramped up coal production to offset declines in imports of coal and LNG amid surging global energy prices, and analysts expect natural gas consumption to contract further in 2022 while coal consumption continues to rise.

The trend is in line with natural gas demand destruction in several industries that have a high share of gas usage, such as ceramics that requires high-temperature gas furnaces, and a wider switch toward cheaper fuels, like coal and oil, in the region to keep the lights on.

China's total natural gas supply, comprising domestic production and imports of pipeline gas and LNG, fell 6.6% year on year to 28.85 billion cubic meters in April, according to official data.

Out of this total supply, imports showed a much sharper decline. China's natural gas imports, including piped gas and LNG, peaked in December 2021 at 16.07 Bcm, and dropped 30% to 11.15 Bcm in April, according to customs data.

LNG imports saw the steepest decline, with March imports down 18% year on year at 4.63 million mt, the lowest since April 2020, and April LNG imports were also trending near the lowest monthly level since early 2020, according to customs and shipping data.

Meanwhile, China's domestic coal production hit a high of 395.79 million mt in March, before slipping to around 362.80 million mt in April, official data showed. The April decline was likely due to some small-sized coal mines lowering production because of tighter supervision on safety, according to market sources, but the average monthly production is trending 12% higher year on year.

China imported 75.41 million mt of coal in the first four months of 2022, accounting for only about 5% of its total supply of around 1,523 million mt over the same period, data from the National Bureau of Statistics showed. In comparison, imports accounted for nearly 50% of total gas supply for China.

"Chinese gas demand will grow by around 2% this year, and we have revised this lower from previous forecasts due to the weak demand seen so far this year amid the high prices along with the continuation of lockdowns," S&P Global Commodity Insights analysts said. "The average annual growth rate of gas demand in China has been around 10% for the last three years."

Gas demand shrinks

China's natural gas demand has been stifled as some gas-fired power plants and factories suspended operations due to unaffordable gas prices, market sources said.

A source with a power producer that runs both gas-fired and coal-fired power plants in the Guangdong province said the utility would maximize coal power generation and minimize gas-fired generation in 2022.

"Although we have secured natural gas feedstock that can meet half of our gas-fired power plants' demand via long-term contracts, prices are still very high," the source said, adding that the utility had to cut gas-fired power generation due to heavy losses recently. "Unlike natural gas which has a nearly 45% import dependence, coal is mostly produced domestically, and prices are largely regulated by the government."

As of May 9, eight provinces and regions in China had set a price range for spot and term coal prices on an ex-port or ex-mine basis, with spot prices for the benchmark 5,500 kcal thermal coal at Qinhuangdao port capped at Yuan 1,155/mt effective May 1, according to the National Development and Reform Commission.

Some ceramics factories in Shandong's Linyi city suspended or lowered operating rates due to high gas costs, Ceramics Information, a Foshan government-backed industrial information provider reported May 9.

Policy shift

Several recent measures were announced to boost coal production and financing coal projects.

On May 11, the State Council said it plans to inject Yuan 10 billion to support coal power generators and boost power generation. "Advanced coal production capacity will be released in a safe and orderly manner and power cuts must not occur," Premier Li Keqiang said at the State Council executive meeting.

The People's Bank of China said April 26 that it will increase its relending quota, which is loans provided to national banks to finance eligible coal projects at prime rates, by Yuan 100 billion ($15.24 billion) to support coal development and boost storage capacity.

China cut import tariffs for all types of coal to zero from May 1, 2022, to March 31, 2023, the Ministry of Finance said April 28. China previously imposed tariffs of 3% to 6% on imported coal, depending on its quality.

The recent measures to boost coal supply were aimed at preventing power shortages similar to the ones in 2021.

Coal-fired power generation accounts for less than 50% of total installed power generation capacity in China, but it produces 60% of electricity output and bears of 70% of peak supply load, making coal the foundation of stable electricity supply in 2021, state media reported in April, citing Yu Bing, deputy director of the National Energy Administration.