BEIJING/SINGAPORE – Chinese officials have directed more than 70 coal mines in Inner Mongolia, to boost coal production by close to 100 million tonnes. The move comes as China faces its worst power shortage and coal scarcity in decades.

Record-breakingly high electricity prices have forced the authorities to ration power across the country. This has had a devastating effect on industrial production.

China would consume almost 33% more thermal coal if the proposed increase is implemented.

An urgent notice dated Oct. 7 asked Inner Mongolia’s regional energy department to contact the cities of Wuhai (Ordos), Hulunbuir and Xilingol League or prefecture informing 72 mines that they might operate at specified higher capacities as long as they guarantee safe production.

A representative from the energy bureau in the area confirmed the notification, but did not say how long it would last.

Graphic: China thermal coal prices surge on strong power demand, tight mine supplies – https://fingfx.thomsonreuters.com/gfx/ce/gdvzywrmapw/ChinaCoalPricesOct2021.png

This notice came after a meeting that took place on the same date, during which regional authorities created plans for winter energy supply in response to orders from China’s State Council or Cabinet.

The newspaper stated that the coal task force of the government will urge miners to increase output without compromise while the power task group shall ensure that generating companies meet winter electricity demand.

Graphic: China power plant coal usage & inventories – https://fingfx.thomsonreuters.com/gfx/ce/movanjmqypa/ChinaCoalPowerPlantUseStocksOct2021.png

According to a Beijing trader, “This shows that the government is serious in raising coal production locally to relieve the shortage.” He said the boost could take two to three more months.

The Inner Mongolia energy bureau has listed 72 open-pit mines. They had an annual capacity of 178.45 millions tonnes.

According to Reuters calculations, the notice suggested that they double their combined production capacity to 98.35 millions tonnes.

Lara Dong (senior director at IHS Markit) stated that although it will alleviate coal shortages, it cannot solve the problem.

She stated that “the government will need to continue to use power rationing in order to maintain the balance of the power market and coal over winter.”

China’s Zhengzhou Thermal Coal futures briefly fell to 6% Friday morning, after having opened up at almost 3%. At 0400 GMT, the contract fell 3.2% to 1,287 Yuan ($197.50 per tonne).

RAISING IMMPORTS

Official data shows that Inner Mongolia, China’s second largest coal-producing area, produced just under 1 billion tonnes of coal in 2020, accounting for over a quarter the country’s total.

However, the output dropped 8% in 2020. The decline was partly attributable to the Beijing anti-corruption probe that was launched last year. Beijing had banned miners from exceeding approved production capacity.

The flooding in China caused 27 of the largest coal regions, Shanxi Province, to close their mines.

China Coal Transportation and Distribution Association data showed that coal inventories in major Chinese ports stood at 52.34 Million tonnes in September, just before the start of a weeklong holiday on Oct 1. This was 18% less than last year.

Graphic: China coal inventories by location – https://fingfx.thomsonreuters.com/gfx/ce/gkvlgxmlbpb/ChinaCoalInventoriesOct2021.png

Despite the fact that coal consumption has been rising, northeastern China’s winter heating season is now underway. Major power plants have stockpiles of around 10 days, an increase from 20 last year.

China has opened a number of mines, and approved many more to provide power and heating for residential customers.

Analysts said that the government also demanded “appropriately” raising coal imports, to levels comparable with last year. This is after imports dropped nearly 10% over the past eight months.

It even freed Australian coal from its bonded storage, despite an almost year-long ban on imports of coal from Australia. Utilities have also tapped into rare sources such as Kazakhstan and the United States.

More coal is needed

Analysts and traders believe that China will benefit from extra production in Inner Mongolia, but it may be too late to increase its supply. Winter is coming soon so even an additional 98 million tons annual output might not help.

Guosheng Securities analyst expects China’s coal shortage will reach 116,000,000 tonnes by 2021 despite 31 million tonnes of newly approved capacity coming online from the fourth quarter.

James Stevenson from IHS Markit said that more announcements to increase coal production will be required and that they expect them to. He also stated, “More” because China already has all the tools it needs to manage domestic demand and push its own supply.

The benchmark spot prices for thermal coal at northern ports of Qinhuangdao reached a new record of 1,079yuan per ton in September.

With rising coal prices, power plants continue to see their balances fall and face closure.

“Many people and businesses wouldn’t have been sitting in dark if China built more coal power plants and less solar and wind capacity”, said Lauri Mllyvirta of the Centre for Research on Energy and Clean Air. She stated that the shortages caused by volatile fossil fuel prices and were not due to the substitution of fossil fuels.

($1 = 6.4507)