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China’s sabbatical from seaborne coal market hints at emphasis on self-reliance

Even though China’s reliance on coal-fired power is not seen falling anytime soon, indications from data and policy makers suggest that the world’s largest producer and consumer of coal may be actively looking toward meeting majority of its requirements through domestic production.

China has shown strong resolve to increase domestic coal production this year and create a reserve to secure its energy requirements. The step is seen by many market participants as a precautionary measure after low coal stockpiles led to power cuts for its industries in late 2021.

While China’s imports of thermal coal fell 16% on the year to 75.41 million mt in January-April 2022, domestic coal production picked up by 10.5% on the year to 1.45 billion mt in the same period.

The country aims to produce an additional 300 million mt coal this year over the record high production of 4.07 billion mt in 2021, according to the National Bureau of Statistics, or NBS.

While China’s imports have risen year-on-year in the last five years, market participants expect the sharp rise in domestic production to reduce import requirement this year.

“China usually requires 10% of coal to be blended with domestic production but now that number is only about 5%, so if they want to cut that further down, it won’t be hard for them but it will lead to a lot of volatility,” an Indonesia-based producer said.

“But the quality of coal may not be appropriate for emission targets, may be it would make sense to blend. Also, to meet emission targets, they must renew coal-based power plants’ efficiency. Reducing imported coal may not achieve that.”

China imported 269 million mt coal in 2021, the highest since 2013, according to the NBS data. However, according to S&P Global, the imports are projected to fall by 17.2% to 222.6 million in 2022 and remain largely flat at 225 million in 2023. “China has the capability to reduce imports by a significant portion,” an India-based trader said.
Lockdown-induced demand shock

Cola traders primarily believe that weak import demand from China is emanating from the lockdowns resulting from the country’s zero-Covid policy, apart from an increase in production.

Industrial output shrunk by 2.9% in April, and electricity production fell by 4.3% on the year to 608.6 billion KWh in the same month. The electricity production has increased merely by 1.3% to 2.6 trillion KWh in January-April.

Further, sources said that the import demand was also disincentivized as market participants expect easier transportation of domestic coal once maintenance of Daqin Railway is complete.

Even though Indonesian producers expect Chinese buyers to return to the seaborne market once the lockdowns ease, there are expectations that domestic policies may limit a sharp rise in demand in the spot market.

Price controls

Chinese authorities have been attempting to control the domestic coal prices since September 2021, with price caps on long-term contracts as well as the spot market, sources said.

Changes in rules and strictness on adherence to price caps have dried up liquidity in the futures market and curbed price discovery in the domestic market, sources said.

The price of the Qinhuangdao 5,500 kcal/kg NAR coal has been capped at Yuan 770/mt effective May 1, and long-term contracts were capped at Yuan 700/mt. Sources said that power producers had reduced their exposure to the spot market and were able to procure coal through long-term contracts in a reduced-demand environment.

Market participants have also pointed toward an increase in investment towards renewables such as solar, wind and hydropower, that may reduce reliance on coal-fired power plants in the medium term.

Focus on Indonesian, Russian prices

A backseat by China in the coal market would impede plans to step up production, as prices would remain rangebound for sellers that supplied to China, sources said.

Indonesia supplied close to 62% of China’s coal imports in the first nine months of 2021, while another 26% was supplied from Russia, according to data by S&P Global.
In 2022, with China reducing imports, Indonesia’s coal prices have remained rangebound. The Kalimantan 4,200 kcal/kg GAR price has increased by 38.6% to $87.95/mt year-to-date as on May 23, according to S&P Global data. However, since the absence of Chinese buyers in the market largely due to COVID-19, the price has moved in a range of $87.95-$94/mt, the data showed.

Sanctions on Russian coal after the breakout of the Russia-Ukraine war has led to a steep discount on Russian coal in comparison to the fuel from other origins. Market participants expect a sharp increase in Russian coal exports to China in 2022 as a result.

The Russian Pacific 6,300 kcal/kg GAR coal price slipped from $191/mt FOB on Feb 18, the last date Platts assessed the grade before Russia invaded Ukraine, to $170/mt on May 20, according to S&P Global data. During the same time, price of Newcastle 5,500 kcal/kg NAR coal with 23% ash moved from $157.05/mt on Feb 18 to $203/mt on May 23.

Source: Platts

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