China, the world’s largest consumer of coal, urgently needs more supplies and is ready to pay any price – a move that threatens to leave less fuel to its energy-hungry rivals.
As winter approaches for much of the world and natural gas prices hit record highs, economies around the world vie for limited supplies of coal. At the center of the rush is China, where stocks are low and demand at an all time high. The dirtiest fossil fuel, which was battling cleaner sources of energy, is now experiencing its biggest comeback of all time, complicating international climate talks that are expected to start in just a few weeks.
China will expand its purchases of coal at “any price to provide heating and power generation in winter,” the China Electricity Council said in a statement on Monday. While more than 90% of the fuel used by the country is extracted locally, it is difficult to increase local production in the short term.
European coal has reached a 13-year high, and Australian coal from Newcastle has jumped 250% since last September to fall within the range of the record set in 2008.
A few months ago, Chinese buyers were on the sidelines of the spot market, complaining of prices that were too high and seeing that they could weather the storm with domestic stocks, according to traders familiar with the matter. Now those buyers are singing a different tune, as power plant operators have gone frantic, asking traders and importers to source cargo from overseas, they said.
Meanwhile, coal consumption in Europe is expected to increase during the winter due to declining renewable energy production, record natural gas prices and planned shutdowns of nuclear reactors. India’s massive fleet of coal-fired power plants is dangerously depleted, with more than half of the country’s power plants with less than a week of inventory. It will need more overseas supplies to compensate for weak domestic production, which will further tighten the already tight spot market.
“Asia does not have enough coal,” said Saad Rahim, chief economist of the large commodity trading house Trafigura Group.
China has traditionally bought almost all of its coal supplies from Asian producers, but that changed last year when it stopped buying from Australia due to a political dispute between trading partners once close, resulting in sporadic shortages.
As an alternative, China has started to steadily increase coal imports from some of the major suppliers in South Asia and Europe. The country has imported 4.4 million tonnes of thermal and coking coal from South Africa so far this year, up from zero from 2015 to 2020, according to customs data. Imports from Russia, a key supplier to Europe, have doubled so far this year, while deliveries from the United States have increased sevenfold.
At the same time, Europe made efforts to divert shipments from Asia. Eastern European importers are buying supplies from Australia – a rare move that illustrates how desperate they are for coal, according to traders, who requested anonymity to discuss private details.
The stocks of six major Chinese energy groups are down 31.5% from a year ago and the lowest seasonal level since 2017, Morgan Stanley analysts, including Sara Chan, said in a research note from the September 27. “Low inventories of independent power producers quickly drove up demand for coal storage, causing coal prices to soar in times of seasonal weakness,” they said.
While China extracts half of the world’s coal, its supply has not been able to keep up with its skyrocketing demand. Thermal power generation in the year through August is 14% higher than last year, while coal production is up 4.4%, largely due to safety measures after a series of high-profile fatalities. Imports have increased by more than 20% since early June, but the country still needs more to close this gap.
âGiven the coal shortage in the country, we can expect China to step up its purchasing activity,â said Abhinav Gupta, dry cargo research analyst at Braemar ACM Shipbroking.
To make matters worse, global coal supplies have plummeted as major Colombian and Indonesian producers faced heavy rains, while some mines elsewhere have closed due to the pandemic. Investments in new mining projects have all but come to a halt in recent years, with banks cutting loans to coal companies as the world seeks to avoid the worst effects of climate change.
“We are seeing a shortage of coal in some markets” following the energy crisis in Europe, Colombian Minister of Energy and Mines Diego Mesa Puyo said in an interview. The Dominican Republic has faced coal procurement challenges due to the overseas crises, and Colombia is working to secure the nation’s supply from its own mines, he said. declared.
Labor shortages make it difficult to hire additional miners to add shifts, according to Ernie Thrasher, CEO of Xcoal Energy & Resources LLC. Some of Xcoal’s current deliveries are two to four weeks late amid high demand, although Thrasher described the disruptions as “nothing out of the ordinary.”
For China, options for dealing with the global supply crisis are limited. Beijing could decide to relax the ban on imports of Australian coal, although that may not be politically acceptable. Or the government could decide to restrict supply to factories at the expense of economic growth.
“If you look at China, they haven’t been able to restock during the time they are expected to restock,” Jan Dieleman, Cargill International’s shipping operations manager, said earlier this month. . “You have a very strong energy market, which is probably going to move a lot of coal at least during the next winter period.”
(Updates with comments from the Colombian Minister of Energy below the final table.)
-With help from Dan Murtaugh, Joe Ryan, Will Wade, Javier Blas, Serene Cheong and Alfred Cang.