Chinese officials have ordered the country’s two top coal regions to act immediately to expand their annual production capacity by more than 160 million tons as China battles its worst power crunch and coal shortage in years.
Authorities face prices at record highs and electricity shortages that have prompted power rationing across the country, crippling industrial output and threatening economic growth.
Shanxi, China’s biggest coal-producing region, ordered its 98 coal mines to raise their annual output capacity by 55.3 million tons over the remainder of the year, an official from the provincial government confirmed on Friday, October 8, in a document reviewed by Reuters.
Shanxi will also allow some 51 coal mines that had hit their maximum annual production levels to keep producing in the fourth quarter and to raise capacity by 8 million tons, which is expected to add 20.65 million tons of extra supply.
In China’s No. 2 coal region, Inner Mongolia, an urgent notice dated October 7 from the region’s energy department asked local authorities to notify 72 mines that they may operate at stipulated higher capacities immediately, provided they ensure safe production.
A department official declined to say how long the production boost would be allowed to last.
The notice followed a meeting during which regional authorities mapped out measures for winter energy supply in response to mandates from China’s State Council, or Cabinet, the Inner Mongolia Daily reported on Friday.
“The [government’s] coal task force shall urge miners to raise output with no compromise, while the power task team shall have the generating firms guarantee meeting the winter electricity and heating demand,” the newspaper said.
“This demonstrates the government is serious about raising local coal production to ease the shortage,” said a Beijing-based trader, who estimated the production boost may take two to three months to materialize.
The 72 mines Inner Mongolia mines, most of which are open pits, previously had authorized annual capacity of 178.45 million tons.
The notice proposed they increase that by 98.35 million tons, Reuters calculations showed.
“It will help alleviate the coal shortage but cannot eliminate the issue,” said Lara Dong, senior director with IHS Markit. “The government will still need to apply power rationing to ensure the balancing of the coal and power markets over the winter.”
China’s Zhengzhou thermal coal futures briefly slumped 6% on Friday morning after opening up nearly 3%. The contract was down 3.2% at 1,287 yuan ($197.50) per ton at 0400 GMT.
Prices of other power-generating commodities have surged this week, including fuel oil, methanol, and liquefied petroleum gas (LPG). All of which have gained at least 10% from a month ago as power generators scramble for fuel.
Inner Mongolia churned out just over 1 billion tons in 2020 accounting for more than a quarter of the national total, official data show.
However, that output was down 8% in 2020 and fell each month from April through July this year, partly due to an anti-corruption probe initiated last year by Beijing targeting the coal sector, which led to lower production as miners were banned from producing above approved capacity.
Neighboring Shanxi province had to close 27 coal mines this week due to flooding.
Coal inventories at major Chinese ports were at 52.34 million tons in late September before a weeklong national holiday that started October 1, down 18% from a year earlier, data compiled by China Coal Transportation and Distribution Association showed.
To ensure power and heating supply to residential users, China has reopened dozens of other mines and approved several new ones.
The government has also called for “appropriately” raising coal imports to levels on par with last year, analysts said, after imports fell nearly 10% in the first eight months.
It has even released Australian coal from bonded storage despite a nearly yearlong unofficial import ban, and utilities have tapped rare supply sources such as Kazakhstan and the United States.
Meanwhile, coal consumption is climbing in northeastern China as the winter heating season has arrived, with major power plants holding average stockpiles of around 10 days’ use, down from more than 20 days last year.
Citi predicted that the squeeze would persist, forcing China to require a 12% cut in industrial power use in the fourth quarter – more in the event of a cold winter.
“This would increase stagflation risks and growth pressures on the Chinese and global economy over the coming winter,” Citi analysts wrote in a note.
Despite the announced increase plans from Shanxi and Inner Mongolia, not much is expected to be added in time for this winter, analysts and traders said.
Analysts from Guosheng Securities expect China’s thermal coal shortage to top 116 million tons in 2021, despite some 31 million tons in newly approved capacity gradually coming on line from the fourth quarter.
“More [announcements to boost coal output] will be needed and we expect it to come,” said James Stevenson, coal analyst from consultancy IHS Markit, adding that China has used all its main tools to push domestic supply and manage demand.
Benchmark spot thermal coal prices in the northern port of Qinhuangdao hit a record high of 1,079 yuan a ton in late September.
As coal prices rise, more power plants are seeing their balance sheets fall into the red and even face shutting down.
“Many more people and businesses would have been sitting in the dark had China just built coal power plants and not expanded solar and wind capacity,” said Lauri Myllyvirta, lead analyst at the Centre for Research on Energy and Clean Air, noting volatile fossil fuel prices have caused shortages, not the replacement of fossil fuels with renewables. – Rappler.com
$1 = 6.4507 Chinese yuan