China power crunch could clear Aus coal - Woodmac

8th October 2021

PERTH ( – Power supply issues in China could force Chinese authorities to allow custom clearance of stranded Australian thermal coal, analyst Wood Mackenzie (Woodmac) said on Friday.

Large-scale power restrictions were observed in the last two weeks of September in China on a scale not seen in the last two decades, Woodmac noted, adding that at least 18 provinces had implemented demand shedding including industrial power houses Guangdong, Zhejiang and Jiangsu, as well as coal-rich inland regions such as Inner Mongolia.  

Three key causes of the power crunch include booming electricity demand, strict implementation of energy and environmental targets, and most importantly, record high coal prices. 

“China’s higher power demand growth has pushed up coal prices. We estimate that over 50% of this year’s power demand growth will have to come from coal-fired power,” said Woodmac research director Alex Whitworth.

Coal provides about two-thirds of China’s power and unsurprisingly, the National Development and Reform Commission (NDRC) reported that thermal power generation, mostly from coal, grew by 12.6% in the first eight months of 2021.  

China’s seaborne thermal coal price marker, the Qinhuangdao 5 500, has increased to $230/t even as the peak summer season ended in September, more than twice the price in the same period last year. As a result, the coal price delivered to power stations is now around $11/million British thermal units, a price level more commonly associated with liquefied natural gas (LNG) imports, said Whitworth.

“As coal prices continue to escalate, Chinese power generation companies are left in a limbo. The country’s hybrid system of selling coal power to the grid around a regulated band means costs cannot be passed through to consumers. Although most coal generators are not fully exposed to spot thermal coal prices, over 90% of power plants have been loss-making so far this year.  

“As the country grapples with one of the most gripping power crises in the last two decades, there are signs that China could be softening its stance on stranded Australian coal,” Whitworth added.

He noted that Chinese importers have told Woodmac that they believe they will now be allowed to clear Australian coal through customs. Most of this coal has already been unloaded into stockpiles at ports but has previously not been allowed to clear customs. Customs authorities have yet to officially confirm this with owners of the cargoes. 

“We estimate around five-million tonnes coking and three-million tonnes of Australian thermal coal stockpiled in Chinese ports that could be cleared into China’s domestic market,” principal analyst Rory Simington said.

“The quantity of stockpiled thermal coal is not sufficient to have a significant impact on prices in China’s domestic market. Coking coal’s quantity is more significant to China’s domestic market and could lead to easing in domestic price.”  

Meanwhile, Woodmac managing consultant Yu Zhai added that the new supply easing measures released in China this week could change things. Inner Mongolia autonomous region and Yulin city of Shaanxi province have announced that they will be increasing supply to meet demand. 

“The market tightness will moderate to some extent accordingly. The coal inventory of key generation companies (gencos) dropped to 49-million tonnes by the end of August which is roughly 30-million tonnes lower than last year,” Zhai said.

“As gencos suspended traditional restocking in September this year, we expect the gap of inventory in September or early October to widen to 40-million tonnes or even more year-on-year. The increasing supply will help gencos to increase their inventory gradually. We do not expect the Qinghuangdao price to slump as there is no significant change on fundamentals.”  

China is performing a balancing act between strong industrial growth and high energy costs and is doing its best to alleviate the latter. The intense power cuts are unlikely to continue and a move to a more orderly system of chronic demand shedding focused on specific sectors is evolving. The overall target will be to maintain high-value economic growth sectors including high-tech manufacturing and services, while cutting coal burn in energy-intensive sectors. 

Whitworth said that chronic but managed demand shedding could impact about 5% of power demand in the last quarter of the year, or about 1.2% of annual demand.

“So rather than hitting 11% or higher power demand growth in 2021, we expect annual electricity demand to be kept at around 10% - most of which has already happened. 

“The government is already moving to increase domestic coal supply and is likely to make some modest upwards adjustments to regulated on-grid coal tariffs and end-user tariffs later in the year to ease pressure. But utilities will still lose a significant amount of cash and the government will still be in effect subsidising power costs for consumers including industry.”