Chinese coal prices hit record high and power cuts continue

Flooding in northern China is hitting a major coal production center hard, sending coal prices soaring and complicating efforts by Beijing to tackle ongoing power shortages.

Heavy rains have forced the closures of 60 coal mines in Shanxi province, China’s largest coal mining hub, according to a statement released Saturday by the provincial government’s Emergency Management Bureau. The province is home to a quarter of the country’s coal production.

Steam billows out of the cooling towers at a coal-fired power station in Nanjing in east China's Jiangsu province on Monday, Sept. 27, 2021. Global shoppers face possible shortages of smartphones and other goods ahead of Christmas after power cuts to meet government energy use targets forced Chinese factories to shut down and left some households in the dark. (Chinatopix via AP)

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The adjacent Shaanxi province, which ranks third in the country for coal output, also reported heavy rains and mudslides that hurt operations at local mines, according to the the state-owned Securities Times, a national financial newspaper.

The price of thermal coal futures, which is primarily used to generate power, surged to all-time highs Monday on the Zhengzhou Commodity Exchange — up as much as 12% to 1,408 yuan ($219) per metric ton. The price has more than doubled so far this year.

Coal is the main source of energy in China and is widely used for heating, power generation, and steelmaking. Last year, it made up nearly 60% of China’s total energy use.

And the extreme weather hit just as China was attempting to ease power shortages by ramping up coal production and allowing coal-fired power stations to charge more for their electricity.

Energy shortages have spread to 20 Chinese provinces in recent weeks, forcing the government to ration electricity during peak hours and some factories to suspend production. That’s hurt industrial output and is weighing on China’s economic outlook.

Why is China short of power?

The power shortage is a result of a range of factors that have boosted demand and reduced supply. China’s post-pandemic construction boom has been heavily reliant on fossil fuels, while a national push to reduce carbon emissions led hundreds of coal mines to shut down or slash production earlier this year — driving coal prices higher. Restrictions on coal from key supplier Australia and weather woes have exacerbated the issue.

A hotter-than-usual summer pushed people to use a record amount of power in July, according to China’s National Energy Administration. The agency added that overall power consumption from January to August grew 14% compared to the same time last year. But renewable energy sources, such as hydropower, have been hobbled by drought in recent months.

“China’s electricity cuts will add to economic stresses, weighing on GDP growth for 2022,” Moody’s analysts said in a Monday report. They added that the “risks to GDP forecasts could be larger as disruptions to production and supply chains feed through.”

Barges travel past a power plant in Wangting, Jiangsu province, China, on Sept. 30, 2021.

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The problems led China’s central government on Friday to allow coal-fired electricity plants to increase the price they charge for power by as much as 20%.

“Since the beginning of this year, energy prices in the international market have risen sharply, and domestic supply of power and coal have remained tight,” the State Council, the country’s cabinet, said in statement. “Those factors have led to power cuts in some places, affecting normal economic operations and residents’ lives.”

Power plants in China had been unwilling to boost production because of the high cost of coal. And since Beijing controls the cost of power, producers couldn’t simply raise their prices without the go-ahead from the government.

The government is taking other steps to ease the crunch. Authorities in Inner Mongolia — China’s second largest coal-producing province — on Friday also asked 72 mines to boost production by 98.4 million metric tons, the equivalent of about 30% of China’s monthly coal production.

Workers assemble vehicles at a factory in Qingzhou, in China's eastern Shandong province on September 28, 2021. - China OUT (Photo by STR / AFP) / China OUT (Photo by STR/AFP via Getty Images)

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The energy problem may soon weigh on consumers in other ways, such as tangling supply chains during the upcoming holiday shopping season. The city of Yiwu in eastern Zhejiang province — a major hub for e-commerce trade — is struggling with widespread power cuts, according to the Shanghai-based IT Times.

The newspaper suggested that shortages and cuts in the city, which is the world’s largest wholesale market for kitchenware, toys, electronics and other goods, could dampen China’s annual Singles Day shopping bonanza later this year. The event regularly brings in tens of billions of dollars in sales for major Chinese retailers every year.