How is China planning to overcome the power crisis?

It is being widely predicted that after the Evergrande debt disaster rocked China's real estate and financial markets, the next big crisis that has erupted is the prevailing power crunch due to acute shortage of coal supplies, with toughening emission norms and growing manufacturing demand driving domestic and international coal prices to record highs.

As the prevailing power shortage cripples the country's provinces and cities, China's regulatory authorities have stepped up efforts to ensure safe and stable supply of coal during the winter-heating season when consumption typically peaks.

Coal contracts for winter

As per reports in the Chinese media, the central and local governments have taken steps to supplement the signing of medium and long-term coal contracts and determine emergency coal storage bases to improve supply and price stability.

On 25 Sep'21, a coal contract-signing ceremony was held in Beijing for mid- and long-term agreements for power generation and heating in China's North-east. The coal contract is a coal purchase and sale contract with a clear implementation period. Based on railway transportation, the contract follows a base price + floating price mechanism.

As per latest reports from China, the overall implementation rate of medium- and long-term coal contracts in 2021 has exceeded 90%. Senior officials of the National Development and Reform Commission (NDRC) have informed that the regulatory authorities must continue to increase the coverage of coal contracts and ensure implementation though minute supervision.

Key coal-producing provinces

At the NDRC's behest, Shanxi, Shaanxi, Inner Mongolia, and major coal producing companies held a special meeting on 24 Sep.

Officials at the meeting underlined the need to speed up the release of advanced production capacity, make efforts to increase production and supply, put resources into enterprises, and urge power and coal companies to complete the contracts as soon as possible to ensure supply during winter. Localities and enterprises have also taken measures to promote stable coal prices and supply during the heating season.

In order to ensure smooth operation of power and heat supply in the heating season and the coming spring, Liaoning Province has selected 13 companies including Shenyang North Coal Market Co., Ltd. as the provincial emergency coal storage base in the province. The purpose is to mobilise coal storage resources in emergency situations.

Companies lower prices

Many companies have taken the initiative to lower coal prices. The National Energy Group and China Coal Group lowered prices at Qinhuangdao Port on 24 Sep. The National Energy Group reduced sales prices by RMB 20/t and China Coal Group reduced prices by RMB 10/t.

At the same time, the Inner Mongolia Yitai Group, Inner Mongolia Qingmei Transportation and Marketing Co., Ltd., and Zhejiang Hongxing Supply Chain Company also promised that coal at Qinhuangdao Port will be sold at lower than market prices.

Li Zhongmin, Deputy General Manager of National Coal Trading Centre, said that the tension between supply and demand in the coal market will tend to ease. It is expected that coal resources for heating and power generation will be fully guaranteed in winter, and coal prices won't rise.

"The experience of winter storage in various regions is also becoming more abundant. Many companies in the three North-eastern provinces have winter storage ahead of schedule. After the preliminary supply preparations, it is expected that coal prices will remain within a reasonable range in the critical winter period," Zhongmin stated.

Power problems

China's power generation through Aug'21 was actually 10.1% greater than in the same period in 2020, and nearly 15% more than the corresponding period in 2019, as utilities across the country ramped up power supply to meet surging industrial demand. But, along with higher power generation, came higher emissions, which exceeded pre-pandemic levels in the first three months of 2021.

As per NDRC, only 10 out of 30 mainland Chinese regions achieved their energy reduction targets in the first six months of 2021. Local governments in Zhejiang, Jiangsu, Yunnan and Guangdong provinces have asked factories to limit power usage or curb output.

Amid rampant power rationing affecting industries across the spectrum from food processing and textiles to aluminium and steel, the Guandong provincial authorities issued a notice on 26 Sep restricting further coal-fired power generation capacity, captive coal-based power plants, and also suggested decommissioning of many old existing plants. Industrially advanced Guandong has the highest GDP among China's provinces and has a share of over 6% in the country's coal-fired power production.

Some power providers have sent notices to heavy users to halt production during peak power periods. The impact on industries, particularly power-intensive sectors like aluminium, steel, cement and fertilisers, is significant.

Prices & Imports

Domestic prices of 5500 NAR thermal coal in China have increased by more than 66% from RMB 900/t ($139.30) in Jan'21 to RMB 1,500/t ($232.17) in Sep. Lower inventories, increasing restocking for winter and tight safety controls might stop coal prices from falling sharply.

As the Guagdong example shows, China's "dual carbon" policy will see crackdowns intensifying on carbon emissions in the coming days, although the share of renewables is only around 27% of the total energy mix.

On the other hand, non-coking coal imports are rising on a y-o-y basis from Jul onwards after plummeting drastically in Mar, Apr and Jun to meet growing demand from utilities, CoalMint data shows. However, a de facto ban on Australian coal imports, weather-related disruptions in Indonesia, quarantine measures at China's ports and congestion at ports in the U.S. have combined to complicate the imports scenario.

Will the Chinese government's coal contracts proposal for winter lift the gloom off the power sector? Measures are in place to ease supply in the upcoming peak consumption season, while keeping prices in check.