China is expected to see a year of record coal imports in 2023, as Beijing has taken steps to encourage adequate supplies amid developing El Niño conditions that could bring heat waves and drought.

China, the world's largest coal consumer, imported 182 million metric tons (MMt) of coal in the first five months of 2023, up 89.6% year over year, data from China's General Administration of Customs showed. That is its highest level of imports for the January-May period, according to S&P Global Market Intelligence Global Trade Analytics Suite data going back to 2003.

Coal demand from the industrial sector has been under pressure due to lower exports and the struggling property sector, and El Nino conditions could raise energy demand for air conditioning and hamper hydropower output. The China Meteorological Administration confirmed the arrival of El Nino in the central and eastern Pacific region as of June 13, noting that the weather pattern came one to two months earlier than expected and developed rapidly.

S&P Global Commodity Insights expects China to import a record high of 375 MMt to 385 MMt of coal in 2023.

"Besides the low base effect last year when COVID restrictions were the strictest that has led to the surge in coal imports for 2023, the persistent heat wave in China this year, especially the southern region impacted by El Nino, is expected to further increase coal imports on higher cooling demand and disrupted hydropower generation," Pranay Shukla, director of research and analysis of dry bulk commodities and shipping at Commodity Insights, wrote in a June 19 note.

Price advantage on imports

China is prioritizing short-term energy security to avoid a recurrence of the power shortages that occurred in 2021 and 2022. The country, which relies on coal to generate two-thirds of its power, lifted its unofficial ban on Australian coal and extended zero tariffs on coal imports until the end of 2023.

Thermal coal imports have spiked as a result, with shipments from Indonesia up 65.9% year over year to 89.9 MMt, Russian shipments increasing 88.7% to 18.3 MMt, and Australian supplies rising from zero to 11.2 MMt, according to S&P Global Commodities at Sea data.

Chinese coastal coal-fired power plants have increased purchases of high-calorific coal from Australia and Russia, which has boosted the demand for lower-calorific Indonesian coal for blending to optimize coal-fired boiler operations, Shukla said in an interview.

European coal demand and international prices spiked in March 2022 following Russia's invasion of Ukraine. But international prices have cooled as European coal demand dropped sharply with increasing natural gas inventories, Xue Dingcui, a coal analyst at Mysteel, wrote in a June 15 note. China-based power companies have become more price sensitive after enduring high coal prices in the past two years, while falling prices and high-calorific value give Australian coal more advantages, Xue said.

"Tightness in global energy markets has eased this year, so [international] coal has been flowing into China," Zeng Xiang, a thermal coal analyst at First Futures Co. Ltd., said in an interview.

The price of thermal coal was 676.49 Chinese yuan per metric ton as of June 20, a 62% drop since March 11, 2022, according to Platts price assessments for CFR South China 5,500 kilocalorie per kilogram net as received coal. That is already within Beijing's "reasonable price range" for mid- and long-term contracts for 5,500 kcal/kg thermal coal at the Qinhuangdao port.

Weaker second half

Analysts expect the jump in January-May volumes to push 2023 imports to an overall high, though demand for cargoes could dip due to shrinking profits for importers and weak demand from the industrial sector amid an uneven post-COVID economic recovery.

Beijing asked domestic coal miners to ramp up production in 2022. China's coal output grew 4.8% year over year to 1.91 billion metric tons in the first five months of 2023, according to the National Bureau of Statistics. That growth came with lower heating value, as coal miners prioritized quantity over quality to meet policy requirements over the past two years, according to Zeng.

Coal inventories at Chinese power plants have reached a record high of 187 MMt, Meng Wei, spokesperson for China's state planner National Development and Reform Commission, said at a June 16 briefing.

China's domestic coal prices have fallen because supply has caught up with demand, which could reduce the price advantage of imported coal, Zeng said.

Energy consumption in the residential sector might be higher than expected due to heatwaves, but the weak property market and slumping exports will reduce coal demand from the manufacturing, metallurgical and building materials industries, China International Capital Corp. analysts wrote in a June 14 note. As long as hydropower supply holds up, the country's thermal power market will face little pressure, the analysts said.

Commodity Insights' Shukla expects China's demand for coal imports to be driven by climate issues more than by manufacturing activity. "In the first quarter it was expected that the manufacturer [sector] should be strong but I think that is not happening," said Shukla, estimating that third-quarter imports will rise year over year while fourth-quarter imports will decline.

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