China may face coal shortages despite NEA assurance

Chinese coal consumers may face tight supply availability during summer when air-conditioning demand peaks, despite assurances from the country's national energy administration (NEA) that supplies will be sufficient.

Chinese thermal coal stockpiles are unusually low for this time of year. This is supporting the domestic market, with prices rising by 48.34 yuan/t ($7.40/t) over the week to Yn736.67/t on 1 April, according to the latest Argus assessment. In dollar terms, prices increased by $7.03/t to $112.32/t. Stockpiles at the key coal transshipment port of Qinhuangdao were at 4.42mn t on 1 April, significantly below the 6.7mn t on the same day last year at the start of the summer restocking season for utilities.

"It is still early to say whether the coal shortages we experienced late last year will repeat themselves on the same scale this summer," a Chinese trader told Argus last week. "But some Chinese importers are rushing to book seaborne cargoes despite high freight rates in anticipation that they can recoup their costs when prices are expected to rise further in the summer when supply is expected to be tight."

The NEA said late last week that it can guarantee the country's energy supply stability through raising domestic production and encouraging imports. But some market participants are regarding the statement with scepticism, pointing out that similar assurances by the central government late last year did little to raise domestic output.

China produced 351.89mn t of all types of coal in December 2020 during the peak of its recent coal shortages when winter heating demand surged. December's output rose by 3.2pc on the year and only marginally by 1.33pc from November, according to data from the national bureau of statistics (NBS). This came despite repeated calls by the NEA and China's economic planning agency the NDRC for domestic producers to raise output from October last year, with tight supplies keeping domestic prices significantly above the government-set upper limit of Yn600/t. Electricity rationing in many parts of China for the first time in nearly 20 years was implemented to cushion the impact of the coal shortages.

The coal shortages started easing only in late January. This was not a result of significantly higher domestic output but because heating demand in most parts of the country had eased with the onset of milder temperatures.

Bureaucratic obstacles

Raising domestic output in China requires the coordination of multiple government departments, which can be a complicated process. The NDRC last week urged major coal producers to raise output ahead of the peak summer demand season. But many producers expressed concerns about corporate and personal liability amid enhanced safety inspections at mines following a series of fatal accidents, according to market participants.

Operations at some coal mines in China's largest producing province of Shanxi have been suspended indefinitely for allegedly breaching safety protocols. This, together with an ongoing corruption probe into Inner Mongolia's coal sector since March 2020, has put some producers on a cautious footing when considering whether to raise output significantly.

Safety inspections are carried out independently of the NEA and NDRC by agencies that may have different priorities. New production permits were issued to some producers in Inner Mongolia late last week, but it remains to be seen if the producers will increase output accordingly.

Easing import restrictions at this point may be insufficient to address the potential shortages because Beijing's informal ban on Australian imports since April last year means that Chinese importers are limited in their options for seaborne cargoes. This has given producers in Indonesia and Russia leverage to significantly raise their offer prices. The Indonesian GAR 5,800 kcal/kg (NAR 5,500 kcal/kg) market was last assessed at $74.99/t fob Kalimantan on 1 April, $4.32/t higher on the week. The increase was largely driven by an increase in Chinese enquiries.

Summer electricity rationing?

Any potential coal shortages over the summer are unlikely to be as serious as during winter because air-conditioning demand is not regarded with the same level of necessity as winter-heating demand.

Chinese authorities encouraged households to reduce air-conditioning use during the summer of 2020 amid Covid-19 containment measures. Premier Li Keqiang strongly criticised electricity rationing last winter because of the hardship inflicted on households during what was a particularly harsh winter. It is possible that Chinese authorities will introduce some form of electricity rationing over the summer if coal shortages become acute.

The Qingming holiday, which ends in China today, typically mark the start of the country's rainy season, in contrast to the drier winter months. Increased hydropower output during the rainy months will also likely help reduce reliance on thermal power, taking some pressure off any potential coal shortages. The country produced 129.2TWh of hydropower during January-February, an increase of 8.5pc on the year, according to NBS data.

By Kelvin Leong