It has been a tough year for international coal markets.
On 1 January, Indonesia banned exports to protect supplies for its power stations. The month-long measure by the world’s largest coal exporter injected volatility into the international coal market, but the war in Ukraine really set prices rocketing.
Data from the website Markets Insider shows that coal cost US$190.65 a tonne the day before Russia invaded Ukraine and more than doubled to $439 in the following weeks. It then fell to $395 on 13 July – still 107 per cent higher than before the war.
The Western-led sanctions on Russia are a factor in the price increase, causing several countries to look elsewhere for supplies and worsening shortages on international markets.
What did this mean for China, the world’s biggest producer, consumer and importer of coal? And how will the energy security concerns arising from tight global coal supplies affect the country’s progress towards its “dual carbon targets” of peaking emissions before 2030 and reaching neutrality before 2060?
A global coal rush
According to the data analysis website Statista, Russia is the world’s third largest coal exporter, accounting for 18 per cent of exports.
One of its biggest customers is the EU. Russia accounted for 46 per cent of the bloc’s consumed coal in 2021, 40 per cent of its natural gas and 27 per cent of its oil, according to the European Commission. On 8 April, the EU announced a fifth round of sanctions targeting Russia, including a ban on coal imports that will come into effect in August.
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Coal production may fluctuate in the short term, but on a long-term view, it has peaked, and there will be little further growth.
Shi Xunpeng, chief researcher, University of Technology Sydney
Two days earlier, the UK committed to end reliance on Russian coal and oil by the end of the year and stop natural gas imports as soon as possible. Also, on 8 April, Japan’s prime minister, Fumio Kishida, said the country would gradually reduce coal imports from Russia and was looking to replace them with supplies from elsewhere, quickly. Japan is Russia’s second-largest coal buyer.
Coal importers were forced to turn to other countries, such as South Africa, the world’s fifth-largest exporter.
According to Reuters, Europe-bound coal shipments from the Richards Bay Coal Terminal in eastern South Africa were 40 per cent higher in the first five months of 2022 than in the whole of 2021. Many countries buying that coal, including Spain, Poland and Germany, only started importing from Richards Bay after the war started. In the first five months of this year, these countries imported 355,000 tonnes, 182,000 tonnes and 157,000 tonnes, respectively.
France had imported seven times as much coal from Richards Bay by May than in 2021. Japan, one of Russia’s neighbours, also increased imports. So far this year, Japan has imported 388,000 tonnes of coal from Richards Bay, almost twice as much as in 2021.
The US and Colombia, both traditional coal suppliers to the EU, have also increased European exports. Business intelligence firm CRU predicts that the US will export an extra 9 million tonnes of coal this year, the most since 2018, and Colombia will export an additional 14 million tonnes.
China increases coal production
While many countries have rushed to import more, China has seen its coal imports fall in the past several months. Recent data from the National Bureau of Statistics show total coal imports of 115 million tonnes for the first half of 2022, a 17.5 per cent fall year-on-year.
Meanwhile, domestic coal output has ramped up. According to the National Bureau of Statistics, China mined 2.19 billion tonnes of coal between January and June, up 11 per cent year-on-year. China’s coal imports for this period represented only 5.3 per cent of domestic production.
That “Indian summer” for coal mining is due to measures taken to stabilise coal prices in response to power shortages experienced in several provinces last year.
By September 2021, rises in coal prices meant costs for coal power generators had rocketed while the prices paid by the grid were fixed. Power stations would lose money by firing up their generators, so the supply of power to the grid no longer met demand. Over 10 Chinese provinces were forced to temporarily shut down power supplies.
In response, the National Development and Reform Commission (NDRC) and other bodies took measures designed to tackle coal shortages and price rises. These included encouraging coal power generators and miners to sign longer-term supply deals and boosting output from suitable mines in Shanxi, Shaanxi and Inner Mongolia. There were also direct interventions in coal pricing by the NDRC.
Coal prices fell, and thermal coal prices remained low even during fluctuations on the international markets. The Bohai-Rim Steam-Coal Price Index (BSPI) peaked at 848 yuan a tonne on 13 October last year, then fell to around 730–740 yuan in February this year – much lower than on the international markets. An analysis by a coal industry website pointed out that domestic coal prices have been uncoupled from the global market.
“International trends have pushed global energy prices up significantly this year. But China’s efforts to stabilise domestic prices have increased and energy supply has held steady,” said Fu Linghui, a National Bureau of Statistics spokesperson and head of its national economy statistics department, at a press conference on 15 June.
The signs show China is boosting domestic coal production to ensure its energy security. Combined with China’s dual carbon targets, it seems coal imports are unlikely to recover.
A paper in the academic journal Joule in April noted that China’s seaborne imports of thermal and coking coal in 2025 are expected to fall by between 52 million and 96 million tonnes from a 2019 baseline of 209 million tonnes, and by between 56 million and 124 million tonnes by 2030.
The falls will be determined by how rapidly China decarbonises and where that happens. If the richer eastern provinces were to phase out coal power as part of achieving the dual carbon targets, they would have a greater impact on imports as those plants are more likely to be fuelled by imported coal. At “mine gate” prices, excluding transportation costs, coal costs around $60 in China, less than on global markets. But when transportation costs are included, it is cheaper for coastal provinces to import from Indonesia and Australia by sea.
That research found that the cost of shipping thermal coal from northern China to the south will fall as railways and ports improve. Meanwhile, improved efficiency at coal power plants will curb consumption, further reducing the need for imported thermal coal.
Researchers point out that China’s seaborne coal imports will fall unless the country’s coal consumption increases by more than 2–3 per cent a year, which is implausible.
It may be some relief for other coal importers to know that China, the world’s biggest coal importer, will be buying less.
Delayed decarbonisation?
In April 2021, at the Leaders’ Summit on Climate, China’s president, Xi Jinping, announced strict controls on coal for the 14th Five Year Plan period (2021–2025) and that consumption would be reduced over the following five-year period. This additional commitment on coal consumption followed the dual carbon targets. Reducing the proportion of coal in the energy mix is crucial for China’s decarbonisation process.
Despite the recent rebound in coal output, experts told China Dialogue that there is little scope for further expansion in the sector, saying decarbonisation and the low-carbon transition are inevitable in the long term.
Yuan Jiahai, a professor at North China Electric Power University’s school of economics and management, said: “It may be a mistake to think that China relying on domestic coal to ensure energy security is equivalent to failing to reduce emissions. Given current circumstances on international energy markets, China has no choice but to rely on coal for energy security in the short term. But in the long term, decarbonisation will only happen faster.”
Shi Xunpeng, chief researcher at the University of Technology Sydney’s Australia-China Relations Institute, and president of the International Society for Energy Transition Studies, said the increase in coal output might suggest a setback in China’s energy transition. However, the impact of the Russo-Ukrainian War and increases in natural gas prices have meant many countries are turning to coal. He said that, for now, it is a global trend.
But looking ahead, Shi is optimistic: “Coal production may fluctuate in the short term, but on a long-term view, it has peaked, and there will be little further growth.”
China’s economic growth is slowing, leading some experts to say that even trends seen in the first half of the year may be short-lived: “2021 saw a new high for coal consumption in China, but that is unlikely to continue,” said Dr Yang Fuqiang, a research fellow at Peking University’s Institute of Energy.
He added: “Economic trends this year will be a little less strong, and so demand for coal power will weaken. We need to look at the second half of the year. The economic situation has subdued coal-consuming sectors such as steel and cement making, so there will be little growth in demand for coal for non-power generation purposes. Any growth would come from coal power. If that fails to materialise, it is likely that output and consumption will be, at most, the same as last year.”
After the nationwide Covid lockdowns in early 2020, the Chinese economy rebounded strongly in the second half of 2020 and into the first half of 2021. However, rules to restrict refinancing by indebted property firms threw the sector – a major part of the Chinese economy – into a debt crisis that continues today. That has had a knock-on effect on associated energy-intensive industries, such as steel and cement making.
To avoid an economic slowdown, the central government is encouraging local governments to promote infrastructure construction that would benefit steel and cement makers. But analysts point out that local governments may not be keen because they are already indebted, and revenues from auctioning land to developers, which is an essential source of their income, are declining.
With demand soft, the amount of coal burned is decreasing even though more is mined. According to the National Bureau of Statistics, thermal power generation, which is primarily coal-fired in China, has seen year-on-year decreases every month since last November. In April and May this year, declines hit double-figure percentages.
An increasing amount of coal is being stored at coal power plants. Data published by the National Development and Reform Commission on 14 July shows China’s coal power plants have 170 million tonnes of coal in storage, 60 million tonnes more than this point last year. There is enough coal in storage to run those plants for 26 days.
Despite the gap between supply and demand, China started work on at least 10 new coal plants between January and April. Others are being approved. This may be financially risky, but provinces are eager to guarantee their energy security and prevent a repeat of the electricity shortages experienced last year when power supply from neighbouring provinces could not be counted upon in times of emergency.
Shoring up energy security by expanding the coal supply appears to be a tactical move only. Renewables remain the future.
“The government has made it clear that coal consumption will start to fall from 2025 onwards. That means there’s no time to open up new mines to ensure supply,” said Yuan.
He added: “Over the last two years, extra output has come from removing restrictions on high-quality existing coal mines; there’s been little prospecting and opening of new mines. And the key to ensuring energy security is actually a new electricity system based around renewables.
“The problems with international energy markets have sent a clear message: there is a major issue with over-reliance on oil and gas. So, speeding up the development of renewables at home will, in fact, tackle our long-term energy security issues at the root,” said Yuan.
Recently, the National Development and Reform Commission, the National Energy Administration and other government bodies published a plan for renewable energy during the 14th Five Year Plan period (2021–2025). It stated that faster development of renewables and their use to replace other forms of energy is a major part of creating a clean, low-carbon, safe and efficient energy system and is essential for ensuring China’s energy security.
According to the plan, renewables will account for more than 50 per cent of primary energy consumption by the end of the period and more than 50 per cent of generation growth to meet increased demand. Wind and solar will provide the bulk of those increases.
This article was originally published on China Dialogue under a Creative Commons licence.
