China’s sabbatical in maritime coal market hints at focus on self-reliance

Even though China’s reliance on coal-fired power isn’t expected to decrease anytime soon, indications from data and policymakers suggest that the world’s largest coal producer and consumer may be actively seeking to meet the majority of its needs thanks to national production.

China has shown its determination to increase its national coal production this year and to create a reserve to meet its energy needs. The move is seen by many market participants as a precautionary measure after low coal stocks led to power cuts for its industries in late 2021.

While China’s thermal coal imports fell 16% year-on-year to 75.41 million tonnes in January-April 2022, domestic coal production increased 10.5% year-on-year to 1 .45 billion tonnes over the same period.

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

While Chinese imports have increased year-on-year over the past five years, market participants expect the surge in domestic production to reduce import requirements this year.

“China usually requires 10% of coal to be blended with domestic production, but now that figure is only around 5%, so if they want to reduce more, it won’t be difficult for them, but it will cause a lot of volatility,” said an Indonesian producer.

“But the quality of the coal may not be appropriate for the emissions targets, it may be a good idea to mix it up. In addition, to meet emissions targets, they must renew the efficiency of coal-fired power plants. Reducing imported coal may not achieve this.

China imported 269 million tonnes of coal in 2021, the highest since 2013, according to BNS data. However, according to S&P Global, imports are expected to fall 17.2% to 222.6 million in 2022 and remain largely flat at 225 million in 2023. “China has the ability to reduce imports significantly,” said a trader based in India. said.
Lockdown-induced demand shock

Cola traders mainly believe that weak import demand from China stems from shutdowns resulting from the country’s zero-Covid policy, in addition to an increase in production.

Industrial production fell 2.9% in April and power generation fell 4.3% on the year to 608.6 billion KWh in the same month. Electricity production only increased by 1.3% to reach 2.6 trillion KWh in January-April.

In addition, sources said import demand was also discouraged as market participants expect easier transportation of domestic coal once Daqin railway maintenance is completed.

Even though Indonesian producers expect Chinese buyers to return to the maritime market once the closures are lifted, national policies are expected to limit a sharp increase in demand in the spot market.

Price control

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

Changes in rules and strict enforcement of price caps have dried up liquidity in the futures market and hampered price discovery in the domestic market, sources said.

The price of Qinhuangdao NAR 5,500 kcal/kg coal was capped at 770 yuan/ton from May 1, and long-term contracts were capped at 700 yuan/ton. Sources said power generators had reduced their exposure to the spot market and were able to source coal through long-term contracts in an environment of reduced demand.

Market participants also pointed to an increase in investment in renewable energy such as solar, wind and hydro, which could reduce dependence on coal-fired power plants in the medium term.

Focus on Indonesian and Russian prices

A Chinese back seat in the coal market would hamper plans to increase production as prices would remain constrained for sellers supplying China, sources said.

Indonesia supplied nearly 62% of China’s coal imports in the first nine months of 2021, while another 26% came from Russia, according to data from S&P Global.
In 2022, with China reducing its imports, Indonesian coal prices remained in a range. The price of Kalimantan 4,200 kcal/kg GAR has risen 38.6% to $87.95/ton year-to-date to May 23, according to data from S&P Global. 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, according to the data.

Sanctions on Russian coal after the outbreak of the Russo-Ukrainian war led to a steep discount on Russian coal compared to fuel from other sources. As a result, market participants expect a sharp increase in Russian coal exports to China in 2022.

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