LAUNCESTON: China is paying a high price for policies that have limited domestic coal production and imports, and led to a fuel shortage that still largely powers the world’s second-largest economy.
The good news for Beijing is that while the scarcity of coal will cause problems for energy-intensive industries, such as steel and aluminum, the situation should be resolved rather quickly.
China has already indicated that it will seek to increase imports, and domestic production is expected to recover sharply in the coming months as more mines will reopen after being idle for security checks.
The problem is that increasing imports won’t completely solve the problem and will be costly, especially if Beijing maintains its informal ban on shipments from Australia, put in place last year amid a political dispute in China. course with Canberra.
Looking first at the national coal situation, it is clear that supply has become an issue in 2021.
While the overall 4.4% gain in the first eight months of the year to 2.6 billion tonnes does not seem too serious, the detail shows that production has trended downward for most of it. of the year, not reversing until August.
China produced a record 351.89 million tonnes in December last year, as mines increased output to meet demand in a colder-than-expected winter.
Since then, domestic production fell to 314.17 million tonnes in July, the lowest since May 2019, according to official data.
Production recovered to 335.24 million tonnes in August, but the total so far this year is still well below China’s potential output.
Had production been kept at December’s record highs, this would have resulted in the extraction of around 2.82 billion tonnes in the first eight months, some 220 million tonnes more than was actually achieved.
It is not entirely realistic to assume that the record production could have been maintained, of course, but what is clear is that China has significantly underperformed its potential when it comes to domestic production of coal.
As for imports, they are down 10.3% over the first eight months of the year to 197.7 million tonnes, according to customs data.
August imports of all grades of coal were 28.05 million tonnes, up from 30.18 million in July, but in general terms the trend has been increasing since May, when imports were 21.04 millions.
Australia was China’s second-largest supplier of coal, with around 60% of its shipments of thermal coal, used for power generation and by industries such as cement, and around 40% of coking coal, used to make steel.
China imported 9.79 million tonnes from Australia in June last year, according to data from commodity consultants Kpler, but that figure had fallen to practically zero by January of this year.
China has turned to Indonesian coal as a replacement, although its energy value tends to be lower than the Australian equivalent, and it buys more from Russia and smaller suppliers such as South Africa and United States.
But in doing so, China triggered huge price increases. Russian coal with an energy rating similar to the Australian grade of 5,500 kilocalories per kg (kcal / kg) which was popular in China is reported by traders as commanding premiums of up to 100% more than Australian fuel.
Indonesian coal is also breaking records, with Chinese buyers competing with more traditional customers like India.
Indonesia’s weekly coal index with an energy value of 4,200 kcal / kg, as assessed by commodity price information agency Argus, hit a record high of $ 91.28 per tonne in the week leading up to September 24 and quadrupled from its 2020 low.
Australia’s high-quality benchmark thermal coal with an energy value of 6,000 kcal / kg, also rose last week, reaching $ 180.70 per tonne, approaching an all-time high of $ 195.25 reached in July 2008.
It is likely to break that record high in this week’s valuation, given that Newcastle coal futures closed on Wednesday at a record high of $ 210.50 a tonne.
These high prices are expected to persist, especially if China tries to increase its imports in the coming months.
There are signs that marine coal is responding to the price hike, with Kpler estimating September’s global exports to reach 121.2 million tonnes, up from 111.8 million in August, and the strongest monthly result since December 2019 .
But the point is that it will take several months for higher exports to work their way through the system, just as it will take several months for China to increase domestic production enough to ease the current supply crunch.
In the meantime, costs will continue to rise, in the form of high coal prices, both imported and domestic, and limited production from energy-intensive industries, which in turn will have a negative impact on chains. supply.