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Winter chill keeps China’s coal prices high, power crunch stokes inflation

Reuters Beijing | Updated on October 14, 2021

Soaring energy prices sent producer prices to their highest in at least 25 years in September, rising 10.7 per cent from a year earlier

China coal prices held near record highs on Thursday as cold weather swept into the country’s north and power plants stocked up on the fuel to ease an energy crunch that is fuelling unprecedented factory gate inflation.

A widening power crisis in China – caused by shortages of coal, record high fuel prices and booming post – pandemic industrial demand as it shifts to greener fuels – has halted production at numerous factories including many supplying big global brands such as Apple Inc.

Soaring energy prices sent producer prices to their highest in at least 25 years in September, rising 10.7 per cent from a year earlier, official data showed on Thursday.

Cold winter weather is likely to worsen the situation.

Temperatures to drop

China’s National Meteorological Centre on Wednesday forecast strong winds could knock the average temperature by as much as 14 degrees Celsius in large parts of the country this week.

The three north-eastern provinces of Jilin, Heliongjiang and Liaoning – among the worst hit by the power shortages last month – and several regions in northern China including Inner Mongolia and Gansu, have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.

Beijing has taken a slew of measures to contain coal price rises including raising domestic coal output, rationing of power at factories and assuring energy supplies will be secured for the winter heating season.

China is confident of achieving full-year goals even though economic growth slowed in the third quarter, Premier Li Keqiang said, reiterating Beijing’s message that the country will ensure power supply this winter and next spring.

Power sector reform

Earlier this week, China, in its boldest step in a decades-long power sector reform said it would allow coal-fired power plants to pass on the high costs of generation to commercial and industrial end-users via market-driven electricity prices. That has boosted expectations among some this would encourage power generators to raise output.

Beijing will allow coal-fired power prices to fluctuate by up to 20 per cent from base levels, an increase on previous limits.

However, others believe it still wouldn’t make up for the high costs of coal.

Efforts to restore power supplies in the country “relies a lot more on administrative pressure and orders than on economic incentives to power plants,” said Lauri Myllyvirta, lead analyst with the Centre for Research on Energy and Clean Air in Helsinki.

“At current coal prices, the tariff increase allowed by the wider price band is a modest sweetener at most.” Myllyvirta said adding “at 1,500 yuan a tonne, the fuel cost per kilowatt hour is 0.6 to 0.7 yuan whereas the benchmarks are generally less than 0.4 yuan per unit.”

In a sign that consumer inflation is not indefinitely immuneto broader price pressures, Foshan Haitian, China’s largest manufacturer of soy sauce, said this week it plans to raise prices by as much as 7 per cent from October 25 due to rising costs for raw materials, transportation and energy.

Beijing had been trying to reduce its reliance on polluting coal power in favour of cleaner wind, solar and hydro.

“Making sure people are warm and keep businesses running – that’s obvious, of course you need to that. Even as an environmentalist you don’t want to get into a situation where you risk turning society against the climate transition,” said Dimitri de Boer, chief China representative with the European environmental consultancy ClientEarth. “But that should be coupled with deploying renewables as fast as possible, to avoid similar situations in the future.”

Loans to hike coal production

Local governments in top Chinese coal producing areas Shanxi and Inner Mongolia have ordered some 200 mines to boost output but flooding in top coal producer Shanxi has worsened the supply outlook, with analysts expecting electricity shortages and rationing to continue into early next year.

Banks are giving loans to coal mines to support production increases. Shanxi Coking Coal Group in China's top coal mining hub has received a 1 billion yuan ($155.30 million) bank loan for resuming operations from floods, according to a China central-bank backed newspaper on Wednesday.

Daily coal output has reached the highest since February at more than 11.2 million tonnes, while the total dispatchable coal inventory in the country can support about 15 days of use, a National Energy Administration official said on Wednesday.

China's coal imports last month rose to their highest this year.

China would like to grow its coal trade with Mongolia, State news agency Xinhua reported on Tuesday. Beijing has also asked Russia to double electricity supplies in November-December, according to Russian news agency TASS on Thursday.

More than half of the regions in mainland China managed by State Grid have enforced power consumption cuts since last month.

The most-active January Zhengzhou thermal coal futures closed up 3.36 per cent at 1,615.8 yuan per tonne on Thursday.The contract traded near record levels hit on Wednesday and have risen more than 200 per cent year to date.

Published on October 14, 2021

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