Why China needs more coal

China’s demand for imports of coal is bound to rise as shortfalls in domestic supply threaten power outages this summer as unusually hot weather is forecast. When households, offices and commercial buildings turn up their air conditioners, supply to industry will be hit unless coal supplies are boosted. Manufacturers in Guangdong are worried about the power situation and some provinces, including Henan, Anhui and Jiangxi, have introduced partial limits on electricity supply or warned that they may have to ration electricity. In Guangdong, officials forecast a shortfall of 4 million kW for this year.

Power has already been reduced at the province’s big manufacturing centre of Dongguan. The shortage in Zhejiang, another major manufacturing and exporting centre, could reach 3 million kW in 2011, according to officials there quoted in Chinese media.

Electricity demand is forecast to increase by 11 per cent in H1/11 to 2.2 trillion kWh, according to the China National Energy Bureau. The supply strain is aggravated by the slow pace of linking renewable energy sources to the state grid and by low water levels in some rivers used for hydro power. Rising prices of fuel make alternative supply from diesel-powered generators more expensive than in the past – the cost of diesel has risen by 20 per cent since October. Hoarding of diesel is reported in Guangdong.

As my colleague Deepak Gopinath notes, global thermal coal markets will tighten even further as India emerges as China's leading competitor for coal from Indonesia, the world's biggest exporter. Unlike China, which tends to tap international markets in an opportunistic manner when domestic coal prices surpass global prices, India is rapidly becoming increasingly dependent on imports, particularly from Indonesia, to fuel its domestic power plants as domestic production lags. As we point out in a recent research note, both India and China face even tighter markets for thermal coal in the years ahead as resource nationalism and rising domestic demand prompt Indonesia to curb the growth in coal exports.

Thermal coal prices in China are at a three-month high and stockpiles are reported to be dwindling at power plants. A report from the state grid says inventories at plants in Hubei fell by 17,000 tonnes a day to 1.66 million tonnes in the first half of this month. Reuters reports that coal stocks in Sichuan have fallen to less than a quarter of their highest levels. Some energy groups have been delaying buying coal in the hope that the government will step in to bring down prices.

The stimulus package launched at the end of 2008 boosted Chinese imports of thermal coal as the government simultaneously pressed its policy of consolidating the industry in Shanxi province and closing unsafe mines. It is encouraging the big state coal groups to absorb or close down smaller mines, paring down private sector involvement which has been a major driver of growth in Shanxi. In other cases, approved local groups have been put in charge of small mines on the condition that they operate within the planning framework and improve safety, providing a flow of orders for manufacturers of safety equipment and mine management advisers.

But the combination of supply problems during this process at a time of high demand has caused spot prices to rise steadily this year. Transport problems have added to the price pressure as rail lines cannot keep up with the traffic. The authorities are counting on the development of rail freight lines from the coalfields of Shanxi, Shaanxi, Inner Mongolia and, eventually, Xinjiang to the east coast for industry there and for onward shipment to the south. In particular, the line being built from Shanxi to the port at Rizhao in Shandong will complement the lines from the province to Qinhuangdao and Huanghua on the northern coast.

The Ministry of Railways estimates that the volume of coal carried by rail could increase by 50 per cent to 3 billion tonnes by 2015. China would also like greater access to coal mined in Mongolia but faces opposition on political grounds, as analysed in our report last September. There is now talk of a long-range conveyor belt being constructed from the South Gobi mines to the Chinese border.