After banning coal imports from Australia in a diplomatic row, China has shot itself in the foot, sending it scrambling to source coal from other parts of the world to feed its own demand. Nathaniel Taplin reports for The Wall Street Journal:
China’s latest efforts to improve conditions in its dangerous, fragmented coal mining industry have contributed to weak supply growth and skyrocketing coal prices. This has also spilled over into the liquefied natural gas market. The situation is reminiscent of late 2016, when a recovering Chinese economy collided with government mine closures, resulting in an enormous coal price spike.
The latest mining safety campaign started in late 2020, spurred on by two catastrophic mining accidents near Chongqing which killed 39 workers. One result has been significantly slowing coal output just as power demand was growing at a record pace in early 2021. Year-over-year growth in domestic coal output from March to August shrank at an average of 1.5% this year even as electricity output growth averaged 8.9%. The result: rapidly falling power plant inventories as the winter heating season approaches. Average inventories across seven large eastern provinces were just 12.5 days last week according to data from CQcoal, the lowest since at least 2015 and less than half the fourth-quarter average in 2020.
Making matters worse are supply disruptions from heavy rains in big coal exporter Indonesia and China’s ongoing feud with Australia, the world’s other key coal exporter. China effectively banned Australian coal imports in late 2020 as relations deteriorated. China has been able to make up most of the gap by buying from other places, but not entirely—imports in the first eight months of the year were still 10% lower than in 2020.
Imports are surging now, however, as coal plants try to rebuild inventories before the heating season. That has pushed up coal prices all over Asia—including, ironically, for Australian coal. The increase is one factor behind the relentless march higher of Asian liquefied natural gas futures, which now trade at around $30 per million British Thermal Units, triple their level as recently as May and five times domestic U.S. prices — themselves near a multiyear high.