An empty coal train travels on the Jitong Railway through the Jingpeng Pass in Inner Mongolia, China.
Source: Rail Photo/Construction Photography/Avalon/Hulton Archive via Getty Images
China is likely to import more thermal coal in the upcoming winter season as COVID-19 curbs and safety checks have slowed domestic coal production.
The country set out to ramp up coal production in 2022 as President Xi Jinping prioritizes short-term energy security. The world's biggest coal consumer approved over 15 GW of coal capacity in just the first half of 2022, compared to about 20 GW of new capacity approved in 2021, according to the International Energy Agency. However, supplies were constrained by COVID-19 outbreaks in the main coal-producing provinces, including Shaanxi and Inner Mongolia, as well as tightened safety inspections at mines and on the Daqin rail line, a key coal transport route.
China's October coal production inched up 1.2% year over year to 370.1 million tonnes, the slowest growth since September 2021, when a coal shortage triggered a nationwide power crunch, data from the National Bureau of Statistics of China showed.
China's energy demand keeps rising despite COVID-19-related lockdowns disrupting manufacturing activity. The China Electricity Council forecast the country's coal-fired power consumption will rise between 2.5% and 4.2% in 2022, state newspaper Shanghai Securities News reported Nov. 9. The council warned that coal output might grow slower than demand, that railway capacity might fall short during peak seasons, and that uncertainties around imports would keep thermal coal supplies tight.
"With energy security increasingly on its radar, Beijing is likely to resort to coal-fired power over winter," ANZ Research analysts Daniel Hynes and Soni Kumari wrote in a Nov. 10 note. "The country's coal output grew strongly in 2022, but it will still fall short of what is required, meaning imported coal will be needed."
Strong appetite for low-calorie thermal coal
Falling international thermal coal prices have drawn buying interest from coal-fired plants in coastal cities.
China's coal imports started to pick up in July. October's thermal coal imports fell from the prior month but rose 2.2% year over year, the first year-over-year increase since April, according to data from S&P Global Market Intelligence Global Trade Analytics Suite.
Coal imports approached record highs in September and October and are likely to remain high through December, driven by lower prices for international mid- and low-calorie thermal coal compared with domestic coal, Zeng Xiang, a thermal coal analyst at First Futures Co. Ltd., said in an interview.
European consumers turned to international coal after the EU's import ban on Russian coal, causing thermal coal prices to skyrocket. But Europe's demand has dropped in recent months after utilities built up stockpiles, and India's coal demand has cooled during its traditional low season. This opened an import window for Chinese buyers, according to Zeng.
S&P Global Platts assessed the seven-to-45-day price of FOB Kalimantan 4,200 kcal/kg GAR coal at $85/tonne on Nov. 24, down from the year-to-date peak of $136/t on March 11.
Miners aim to boost output despite higher costs
China is likely to increase reliance on coal by 2025 due to constrained renewable power. China Electricity Council said the electric power industry's share in coal consumption will continue to grow through 2025.
Summer heat waves and droughts hit electricity generation in hydropower hubs Sichuan and Yunnan. China's hydropower generation fell 17.7% year over year in October, after falling 30% year over year in September, according to the National Bureau of Statistics of China. Hydropower is the second-largest power source in China and accounted for 16.6% of generation in 2021, compared with coal's 66.2% dominance, according to Market Intelligence.
China will continue to boost coal capacity and production. China Energy Engineering Corp. Ltd., a state-owned energy conglomerate, expects China to add 270 GW of thermal capacity during the five years through 2025, the company told investors in September.
Beijing has ordered top coal miners to secure supplies.
State-owned coal mining giant China Shenhua Energy Co. Ltd. increased coal production 5% year over year to 235.4 million tonnes in the first three quarters of 2022. The company has maintained monthly output at high levels in recent years, despite increased production costs.
The miner's production costs rose 22.5% year over year to 170.7 Chinese yuan per tonne for the first three quarters of the year, due primarily to higher electricity prices, staff costs and other operational expenses. China Shenhua Energy expects production costs to increase between 15% and 20% in 2022, CFO Song Jinggang told investors Nov. 4.
As of Nov. 24, US$1 was equivalent to 7.15 Chinese yuan.
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