It has been over a year since China began flexing its economic muscles in an attempt to bend Australia’s political will over their increasingly bitter bilateral disputes.

This was in response to Australia accusing its largest trading partner of the following:

  • interference in its internal politics;
  • not being honest about the outbreak of the COVID-19 pandemic;
  • unjustly arrest Australian nationals in China;
  • committing human rights violations against Uyghurs in Xinjiang; and
  • threatening Taiwan and taking away democracy from Hong Kong.

The Chinese government of President Xi Jinping has responded by restricting the import of billions of dollars of Australian goods, including coal, beef, grains, crops, lobsters and wine.

After more than a year of unofficial trade sanctions and boycotts, China is discovering the limits of its power. While Australia suffered heavy financial losses, it was not unbearable. Instead, the “sanctions” strengthened Australia’s resolve and encouraged other countries to be less afraid of threats from China to use economic retaliation to settle political disagreements.

In recent weeks, the tide has turned unfavorably against China with the onset of an unexpected energy crisis. Global prices for oil, gas and coal, which collectively meet more than 85% of the country’s energy demand, have reached multi-year highs. Highlighting the severity of China’s energy crisis, the price of liquefied natural gas (LNG) in Asia hit a record US $ 56 per million BTUs this week, 10 times higher than just eight months ago.

Across China, local authorities have ordered emergency power cuts, drastically curtailing plant operations and fueling demand for heating just as temperatures begin to drop.

Australian coal

As demand for coal also grows in Europe amid record electricity prices, China is under pressure to quash its unofficial trade war against Australia, a major supplier of fossil fuels.

Consultant Wood Mackenzie believes China may soon allow customs clearance of failed Australian thermal coal in order to immediately increase the supply of raw materials to its energy-consuming provinces.

Here is Wood Mackenzie’s October 8 press release on the coal and power situation in China:

The electricity crisis in China over the past few weeks has made it clear the country’s heavy reliance on coal for power generation. Wood Mackenzie, a company of Verisk (Nasdaq: VRSK), believes Chinese authorities could allow customs clearance of failed Australian thermal coal. In addition, local governments in the Yulin region of Shaanxi Province and Inner Mongolia announced yesterday that they will increase the supply of coal to meet demand.

Large-scale electricity restrictions were observed during the last two weeks of September in China on a scale not seen in the past two decades. At least 18 provinces have implemented demand reduction, including power plants in Guangdong, Zhejiang and Jiangsu, as well as coal-rich inland regions such as Inner Mongolia.

The three main causes of the electricity crisis are the explosion in demand for electricity, the strict implementation of energy and environmental targets and, above all, the record prices of coal.

Wood Mackenzie Research Director Alex Whitworth said: “Higher growth in demand for electricity in China has pushed up coal prices. We estimate that more than 50% of the growth in electricity demand this year will have to come from coal-fired electricity.

Coal provides about two-thirds of China’s electricity and, unsurprisingly, the National Development and Reform Commission (NDRC) reported that thermal power generation (mainly coal) has increased by 12, 6% in the first eight months of 2021.

The price of Chinese maritime thermal coal, the Qinhuangdao 5,500, rose to 1,500 RMB / tonne ($ 230 / tonne) even as the peak summer season ended in September, more than double the price of the same. period last year. As a result, the price of coal delivered to power plants is now around US $ 11 / MMBtu (million UK thermal units), a price level more commonly associated with expensive LNG imports.

As coal prices continue to climb, Chinese power generation companies are left in limbo. The country’s hybrid system of selling coal-fired electricity to the grid around a regulated strip means that the costs cannot be passed on to consumers. Although most coal producers are not fully exposed to spot thermal coal prices, more than 90% of power plants have recorded losses so far this year.

As the country grapples with one of the most gripping energy crises of the past two decades, there are signs that China may relax its stance on stranded Australian coal. Chinese importers have told Wood Mackenzie they believe they will now be allowed to clear Australian coal. Most of this coal has already been unloaded in stockpiles at ports but has not previously been cleared through customs. Customs authorities have yet to officially confirm this with the owners of the cargoes.

Senior Analyst Rory Simington said, “We estimate around 5 million tonnes (Mt) of coking and 3 Mt of Australian thermal coal stored in Chinese ports that could be cleared into the Chinese domestic market.

“The quantity of thermal coal stored is not sufficient to have a significant impact on prices in the Chinese domestic market. The quantity of coking coal is larger for the Chinese domestic market and could lead to lower domestic prices. “

Management consultant Yu Zhai added that new supply easing measures released in China yesterday could make a difference. The Inner Mongolia Autonomous Region and the city of Yulin in Shaanxi Province have announced that they will increase supply to meet demand.

Zhai said, “The tightening of the market will subside to some extent as a result. The stock of coal of the main production companies (gencos) fell to 49 Mt at the end of August, about 30 Mt lower than last year.

“While gencos suspended traditional replenishment in September of this year, we expect the inventory gap in September or early October to widen to 40 Mt or even more year over year. The growing supply will help gencos gradually increase their inventory. We do not expect the price of Qinghuangdao (QHD) to collapse as there is no significant change in fundamentals. “

China is playing a balancing act between strong industrial growth and high energy costs and is working to mitigate the latter. The intense power cuts are unlikely to continue and a shift to a more orderly system of chronic demand shedding focused on specific sectors is evolving. The overall objective will be to maintain high value-added economic growth sectors, including high-tech manufacturing and services, while reducing coal consumption in energy-intensive sectors.

Whitworth said: “A chronic but managed drop in demand could impact about 5% of electricity demand in the last quarter of the year, or about 1.2% of annual demand. So, rather than achieving an 11% or more growth in electricity demand in 2021, we expect annual electricity demand to be held at around 10% – most of which has already occurred.

“The government is already preparing to increase domestic coal supply and is likely to make modest upward adjustments to regulated grid coal tariffs and end user tariffs later in the year to ease the burden. pressure. But utilities will still lose a significant amount of money, and the government will still subsidize electricity costs for consumers, including industry. “

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