China is an industrial power house that mostly relies on coal-fired power generation, and is the largest country in the world in terms of carbon dioxide emission. The major power plants of the country had arrived at the lowest point of reserve power over the past decade in August owing to extreme climate, surging demand for exported Chinese products, and the policy of carbon emission reduction, which resulted in generalization of power shortages. China, in order to resolve this crisis, can only rely on imports. Australia was initially the main source of coal for China, though the relationship between the two countries has been deteriorating, and it will not be such an easy task for China to seek for other coal sources. The power shortage crisis is thus unresolvable within the short term.
Coal occupies 2/3 of China’s power generation volume, while 9/10 of the coal in the country comes from Shanxi, Shaanxi, and Inner Mongolia. Despite the country’s significant construction of wind power and hydropower facilities in recent years, the production of these renewable energy is insufficient in fulfilling recent demand. China is forced to enhance the level of import. The coal from Australia, prior to the fallout between the two countries, had accounted for 70% of China’s coal import.
Australia was China’s largest coal exporter, and the former’s support of investigating the source of the COVID-19 pandemic at the end of 2020 had deteriorated the relationship between the two countries. The latter stopped buying coal from Australia, which led to a sizable reduction in coal imports by 60 million tons, with 3 million tons remaining. China has since turned to countries such as Indonesia, Inner Mongolia, and Russia to replenish the import void.
A coverage from last year claimed that coal mining businesses in Indonesia have signed a US$1.5 billion supply agreement with China. A respective increase of 23 million tons and 7 million tons was seen from the imports of Indonesia and Russia for China over the first eight months of 2021. Zhejiang is also importing from Kazakhstan recently. China had not imported from Kazakhstan over the first eight months of 2021 since it requires railway transportation, and the coal from Central Asian landlocked countries has a higher cost than that of competitors.
Despite seeking for coal all over the world, China had seen a reduction of 7.8% in the total import of coal over the first eight months of the year, and the depleted inventory of coal has ramped up the prices to the highest level over the past decade at approximately US$190/ton, where the price was merely at US$90/ton a year ago. Analysts believe that China, confined by the selection of raw material sources, may be forced to alleviate the sanction on imported coal from Australia in order to mitigate the pressure coming from coal prices, which is a comparatively simple solution. It was also reported today that China has permitted the Australian cargo ship that was stranded at sea to unload roughly 450K tons of coal, which may likely be a signal of moderation in the on-going conflict.
However, the tension between China and Australia may not be easily reconciled. Recent rumor has it that a certain Indian company has recently purchased nearly 2 million tons of Australian coal for a discounted price. Due to the exacerbated status between China and Australia, these fuels have been stored in warehouses in China for several months, which reflects the degree of aggravation of the fallout. Hence, a slight mitigation in the development means nothing to the unchanged major orientation, and it is almost impossible for China to fully revoke the coal sanction on Australia.
Indonesia, despite benefitting from the demand of China, is experiencing bottlenecks in fulfillable shipment, where various restrictions such as logistics and regulations are impeding China from rapidly acquiring a sufficient level of coal from other countries.
Energy-intensive industries are expected to sustain the largest degree of impact from the power rationing. Industrial departments account for approximately 14% of China’s GDP in accordance with the provinces affected by the power rationing. China is currently responding to the severe energy crisis, which is only going to worsen as winter arrives. Various banks have downward adjusted the economic growth rate for China, while the sizable surge of power cost for the manufacturing industry may intensify the level of global inflation, and increase the risk of stagflation.
(Cover photo source: Flickr/Nenad Stojkovic CC BY 2.0)