The world’s largest coal consumer depends on coal for 60% of its electricity. Last year, the fall in national coal production led to a power shortage lasting several weeks which affected the manufacturing industry of the second world economy.
Beijing has since ordered an increase in coal production to record levels and has capped coal prices to ensure they remain affordable for power producers.
But traders say the price cap encourages miners to prioritize coal quantity over quality, which means power producers need increasing volumes of coal as they seek to increase production.
“For the miners, there is not much incentive to produce high quality coal because the margins are so low due to the price cap. Their priority is to produce a sufficient volume of coal to meet the targets set by the government,” said a China-based coal trader.
Thermal coal with a calorific value greater than 5,500 kilocalories per kilogram is generally considered high calorific coal.
Yu Zhai, principal consultant at Wood Mackenzie, said power plants also favor low-quality cargo which is cheaper and helps reduce power generation losses.
GRAPH: China’s coal production versus major thermal coal prices (
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While China is the world’s largest importer of coal and the second largest importer of liquefied natural gas (LNG), the country depends primarily on local fuel supplies for its electricity needs.
In the aftermath of last year’s power shortage, domestic coal miners have duly increased production to record levels, leading to an increase in coal inventories in Chinese utilities by 50 million tons from the previous year, reaching 159 million tonnes in May, according to data released by the state planner.
Most of these stocks consist of medium and low calorific value coal, which power plants have to burn in greater quantities to produce the same amount of electricity as with higher calorific value coal, Zhai said. However, no figures for the amount of low calorific coal in stockpiles were immediately available.
“Some utility companies in southern China saw coal use increase by almost 15% at the end of May compared to last year, but the power generation volume was almost the same,” said a source. another trader based in China.
With the resumption of industrial activity after the recent COVID-19 shutdowns, traders have said the higher proportion of lower-grade coal means there may not be enough coal supply to meet needs. in electricity significantly higher.
The China Electric Council predicted in April that several regions, including southern and eastern China, would experience a power shortage during peak hours in summer.
Electricity consumption has already jumped in provinces north of the Yangtze River due to warmer than normal weather. Regions like Henan, China’s third most populous province, are strained to meet record power demand.
LOWER VALUE IMPORTS
China’s plummeting high-quality coal supplies have been exacerbated by a big shift in China’s coal imports since Beijing placed an unofficial ban on imports from high-quality coal producer China. Australia at the end of 2020, and increased purchases from low-grade coal suppliers in Indonesia and Mongolia.
GRAPH: China’s coal imports from Australia vs. the world (
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Imports typically account for around 7% of China’s total coal consumption and are crucial for power plants in coastal regions.
The average calorific value of coal in major Chinese ports was around 4,800 kilocalories (kcal) at the end of May, compared with around 5,000 kcal at the same time last year, according to a person familiar with the matter who declined to disclose the source of the data due to Beijing’s restrictions on sharing energy inventory data.
GRAPH: Thermal coal stocks in major Chinese ports 
The proportion of thermal coal calorific value above 5,500 kcal fell to its lowest level since at least 2020, less than 10% of total port stocks, the source said.
Although Indonesia also produces high calorific coal, it is more expensive and mainly sold to Europe.
“With high shipping rates at the moment, only cheap, low-quality coal can find a market in China,” said a Singapore-based trader.
Increased coal imports by European buyers eager to replace Russian coal and gas supplies have also reduced supplies of high-quality coal and pushed international coal prices well above Chinese domestic prices, making economically unfeasible imports for many Chinese electrical companies.
To guard against any potential shortfall in electricity supply, Beijing has encouraged hydro and renewable energy producers to generate as much electricity as possible to slow the rate of burning coal reserves.
Other measures Beijing could take to ease electric fuel shortages include capping power consumption at power-intensive power plants and encouraging businesses and individuals to save energy, authorities said. local.
UPSIDE RISK
Traders said recent low levels of electricity consumption in China, due to widespread shutdowns, have partially masked the problem of low volumes of high-quality coal.
Daily utility consumption in eight coastal provinces of China is currently 17 percent lower than a year ago, according to the China Coal Transportation and Distribution Association.
But business activity is picking up after cities like Shanghai and Beijing eased COVID-related restrictions and unveiled new stimulus measures, which could trigger a sustained spike in electricity consumption.
GRAPH: China’s power generation and coal use are expected to rebound from the recent tumble (
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The National Development and Reform Commission, which oversees coal production and consumption in China, did not respond to a request for comment.
Higher-than-usual temperatures expected in eastern and central China this summer could also push up demand for air conditioning, while predicted flooding could disrupt hydropower generation during the winter. next rainy season.
Several regions, including China’s export hub, Zhejiang, have forecast a “tight balance” between power supply and demand.
GRAPH: Electricity production in China, coal production and coal use by power plants (
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“The structural problem is not obvious at the moment, as coal consumption is low. “Coal usage is jumping at a faster rate than usual,” said the top China-based trader.