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China is the world’s largest consumer of coal and desperately needs more supplies, and is willing to pay any price-a move that may leave energy-starved competitors with less fuel.
With winter approaching in most parts of the world and natural gas prices reaching record levels, global economies are competing for a limited supply of coal. The center of contention is China, where inventories are low, but demand is at the highest level in history. The dirtiest fossil fuels have been fighting clean energy and are now experiencing their biggest comeback in history, which complicates the international climate negotiations that will begin in just a few weeks.
The China Electricity Council said in a statement on Monday that China will “expand coal purchases at all costs to ensure winter heating and power generation.” Although more than 90% of the fuel used in the country is mined locally, it is difficult to increase local production in a short period of time.
European coal has risen to a 13-year high, and Australia’s Newcastle coal has soared 250% from September last year, which is within the record range set in 2008.
According to traders familiar with the matter, a few months ago, Chinese buyers took a wait-and-see attitude toward the spot market, complaining that prices were too high, and pointed out that they could tide over difficulties with domestic inventories. They said that these buyers now sing different tunes because power plant operators have become crazy and require traders and importers to purchase overseas goods.
At the same time, due to the decline in renewable energy production, the record high of natural gas prices and the planned closure of nuclear reactors, coal use in Europe is expected to increase throughout the winter. India’s huge coal-fired power plant inventory is seriously insufficient, and more than half of the country’s power plants have less than a week’s inventory. More overseas supplies will be needed to compensate for weak domestic production, thereby further tightening the already weak spot market.
“There is not enough coal in Asia,” said Saad Rahim, chief economist of Trafigura Group, a major commodity trading company.
Australia dispute
China has traditionally purchased almost all of its coal supply from Asian producers, but last year it stopped buying from Australia due to political disputes between its once-close trading partners, resulting in sporadic shortages. This situation has changed.
As an alternative, China began to steadily increase coal imports from some major suppliers in South Asia and Europe. According to customs data, the country has imported 4.4 million tons of thermal coal and coking coal from South Africa so far this year, compared with zero from 2015 to 2020. So far this year, imports from Russia, a major European supplier, have doubled, while deliveries from the United States have increased sevenfold.
At the same time, Europe has been trying to steal goods from Asia. According to traders who requested anonymity to discuss private details, importers in Eastern Europe have been buying supplies from Australia-a rare move that shows their desire for coal.
Morgan Stanley analysts, including Sara Chan, stated in a research report on September 27 that the inventories of China’s six major power groups have fallen by 31.5% from last year, which is the lowest seasonal level since 2017. They said: “The low inventory of independent power producers quickly pushed up the demand for coal inventories, causing coal prices to soar during the seasonally weak period.”
Amazing demand
Although China has mined half of the world’s coal, its supply cannot meet its much-needed demand. In the year to August, thermal power generation increased by 14% compared to last year, while coal production increased by 4.4%. This was largely due to the safety rectification following a series of high-profile fatal accidents. Since the beginning of June, imports have increased by more than 20%, but the country still needs more to fill this gap.
Braemar ACM Shipbroking dry goods research analyst Abhinav Gupta said: “Given the country’s coal shortage, we can expect China to increase procurement activities.”
To make matters worse, as the major producers Colombia and Indonesia are struggling in heavy rains, global coal supplies have fallen, while some coal mines elsewhere have closed due to the pandemic. In recent years, investment in new mining projects has almost ceased, and as the world seeks to avoid the worst effects of climate change, banks have cut loans to coal companies.
Colombian Energy and Mining Minister Diego Mesapyo said in an interview that after the European energy crunch, “we see coal shortages in some markets.” He said that due to the overseas crisis, the Dominican Republic has been facing coal contract issues, and Colombia is working hard to secure some supply for the country from its own coal mines.
Xcoal Energy & Resources LLC CEO Ernie Thrasher said that labor shortages make it difficult to hire more miners to increase shifts. Due to the surge in demand, some of Xcoal’s current deliveries have been delayed by two to four weeks, although Thrasher described the interruption as “nothing unusual.”
For China, the options for coping with the global supply contraction are limited. Beijing may decide to relax its ban on Australian coal imports, although this may be politically untimely. Or the government can decide to limit the supply of factories at the expense of economic growth.
Jan Dieleman, head of Cargill’s international ocean shipping business, said earlier this month: “If you look at China, they failed to replenish the goods when they should be replenishment.” “You have a very strong one. The energy market, at least during the next winter, it may transfer large amounts of coal.”
(Updated with comments from the Minister of Energy of Colombia below the final chart.)
-With the assistance of Dan Murtaugh, Joe Ryan, Will Wade, Javier Blas, Serene Cheong and Alfred Cang.
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