China's Coal Market Ends Volatile Year

An analysis by Michael Lelyveld
2016-12-27
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Chinese coal miner Fan Junlong walks out of a coal mine in Jincheng, northern China's Shanxi province, one of the country's major coal-producing areas, July 22, 2016.
Chinese coal miner Fan Junlong walks out of a coal mine in Jincheng, northern China's Shanxi province, one of the country's major coal-producing areas, July 22, 2016.
Xinhua

Promises of production cuts have stirred up the world oil market this month, but the turnaround in coal prices may be the biggest energy and environmental story for China in the past year.

After a prolonged slump in prices and output since 2013, China's coal mines bounced back with a surge in production and profits in the second half of 2016, thanks in part to government miscalculations and market controls.

Prices for steam coal at China's Qinhuangdao Port distribution center jumped more than 48 percent between January and September to 550 yuan (U.S. $79.16) per metric ton, the official English-language China Daily reported.

In mid-November, spot market prices were reported as high as 750 yuan (U.S. $107.95) per ton, The Australian Financial Review said.

The increases came despite continuing declines in Chinese coal demand over the past three years, according to official reports, leading the government to order cuts in production overcapacity.

But by the end of 2016, China's miners were scrambling to replenish low stockpiles at the country's power plants, while the government struggled to keep prices and pollution under control.

The effects of the sudden shortages in China have been felt in coal markets around the world, said Keisuke Sadamori, head of the International Energy Agency (IEA) directorate of energy markets and security.

“There is no doubt that the main development in 2016 was the price increase, unexpected by many and triggered by Chinese policies to curb the oversupply and exacerbated by some disruptions in Australia, Indonesia and China," Sadamori said at a Paris press conference to preview the IEA's medium-term coal market forecast.

The stage was set for the turnaround in February when the government told coal mines and steel mills to slash surplus production capacity after years of international pressure over low prices and job losses abroad.

The government's top planning agency ordered the coal industry to eliminate 500 million tons of excess capacity by 2020 and consolidate another 500 million tons under more efficient operators.

China accounts for about half the world's coal and steel output, but its coal production capacity has been estimated to outstrip annual demand by as much as 2 billion tons.

‘Progress faster than expected’

For 2016, the National Development and Reform Commission (NDRC) targeted a capacity cut of 250 million tons, a reduction that was met "ahead of schedule" in late November, according to a statement by the cabinet-level State Council.

"Progress came faster than expected," the official Xinhua news agency said in a year-end report.

What the report did not say is that the NDRC repeatedly warned the industry through much of the year that it was not cutting capacity fast enough.

By the end of June, mining companies had achieved just 29 percent of the 2016 target. By August, they had met only 60 percent of the goal, the NDRC said.

At the same time, the government was trying to spur the economy with infrastructure projects that accelerated steel demand, driving up prices and reactivating mills that were supposed to be closed.

Demand for smog-producing coal spiked in the third quarter as prices began climbing and power companies complained that their inventories had dropped below 20 days of supplies.

Logistical snarls and fears of winter shortages added to the crisis, putting the government in the contradictory position of claiming that it was reducing production capacity while pushing the mines to boost output and days of operation.

Ironically, the government has taken credit in the past month for positive reports on industrial output and profits that rely in part on increases from steel and coal producers that were ordered to make cuts.

Last month, the NDRC tried to cool off the coal market by calling on mines to sign mid- and longer-term supply contracts with power producers at prices below market rates.

The tactic may have temporarily succeeded in keeping prices from climbing even higher, but the effect on supplies and shortages remains unclear.

Recent official reports for November paint an ambiguous picture.

According to the National Bureau of Statistics (NBS), coal production in November rose 9 percent from October to 308.1 million tons but lagged year-earlier output by 5.1 percent, Reuters said.

The results contradicted a statement one day earlier from a senior industry official that production had increased both month-on-month and year-on-year after emergency measures to ease shortages, the news agency reported.

Further efforts to increase production have faced delays, said Jiang Zhimin, vice president of the China Coal Industry Association (CISA) in a briefing on Dec. 12.

"Most of the mines in China are underground. It takes time for them to restart production and increase (the number of) workers," said Jiang.

"Some smaller coal mines have ramped up output illegally," Reuters quoted Jiang as saying.

china-pollution-qinhuangdao-hebei-dec19-2016-400.jpg
A Chinese father escorts his son, both wearing face masks to filter out air particles, to school in heavy smog in Qinhuangdao, northern China's Hebei province, Dec. 19, 2016. Credit: ImagineChina
‘Very slow decline’ in demand

In the meantime, the government's claims of capacity cutting appear to clash with a surge in reported mining accidents and smog alerts in urban centers and industrial areas.

Last week, the consequences of coal burning descended on China in the dirtiest smog attack of the past year as Beijing and at least 23 other cities posted their highest-level red alerts, closing highways, airports and schools.

Concentrations of fine soot particles known as PM 2.5 soared above 1,000 micrograms per cubic meter at one monitoring station in Shijiazhuang, the capital of northern Hebei province, Xinhua reported.

The reading is 40 times higher than safe levels established by the World Health Organization.

Industry and environmental analysts cited increased output from coal-burning steel mills as a "likely contributor" to the red-alert smog, China Daily said.

In its Medium-Term Coal Market Report released this month, the IEA continued to forecast a "very slow decline" in China's coal demand over the next five years, reaching a level in 2021 slightly lower than the estimated peak in 2013.

But the study sounded a note of caution.

"Regardless of whether its demand has peaked or not, China will be the largest user of coal by far through the outlook period," the report said.

The question of whether China's coal demand has started growing again is central to forecasts of climate change.

In 2014, the country's coal demand accounted for 51.6 percent of the global total, while coal was responsible for 83 percent of the world's energy-related carbon dioxide (CO2) emissions, according to calculations based on data from the IEA's annual World Energy Outlook.

"In the matter of the price spike this year, I don't think this is going to reframe the structural reforms of the coal sector in China in the coming years," said Carlos Fernandez Alvarez, acting head of the IEA's gas, coal and power markets division, in response to a question from RFA.

But the uneven pace of rebalancing between supply and demand, disrupted by frequent government interventions, may result in further volatility for coal prices in the coming year, said Philip Andrews-Speed, a China energy expert at National University of Singapore.

"I think the combined unpredictability of international coal markets, coal demand in China, net coal mine closure, mine output in China and government price controls will necessarily lead to greater volatility, not least as actors seek to game the system," Andrews-Speed said by email.

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