China coal futures drop on threat of state intervention in energy crisis

Chinese coal prices tumbled on fears of government intervention in the strained energy sector, as Beijing seeks to rein in electricity costs and stem a crisis that has hobbled the country’s economic growth.

Thermal coal futures trading on the Zhengzhou Commodity Exchange, which have hit record levels in recent weeks, fell the maximum 8 per cent for a second consecutive day on Wednesday to Rmb1,755 ($274) a tonne. The CSI Coal index of big China-listed miners dropped 8.5 per cent.

The retreat came a day after China’s National Development and Reform Commission said it would “study specific measures to intervene” if coal prices kept rising, adding that it had organised a meeting with China’s biggest coal producers.

Surging coal prices have made it impossible for many of China’s coal-fired power stations to turn a profit in recent months under low state-set electricity rates, forcing them to cut output and resulting in widespread power shortages.

The NDRC’s statement was the first signal of official intervention in coal prices, which have risen 107 per cent since the beginning of September

China relies on thermal coal for the majority of its electricity but Beijing has been closing coal mines for pollution and safety reasons, while local governments have throttled the use of thermal coal this year in an effort to meet strict emissions targets. That has contributed to a shortfall in domestic supply and resulted in rocketing prices as winter approaches.

To combat the crisis, Beijing has ordered mines to boost output. But erratic weather and flooding in Shanxi, China’s top coal-producing province, have hampered attempts to increase production.

China has also introduced market reforms to incentivise power production including forcing all coal-fired power generators to sell into the wholesale market, allowing electricity prices to rise as much as 20 per cent and lifting price caps for some big users.

But many analysts expected the supply shortfall to persist through to at least the end of the year, weighing on China’s and global economic growth.

“We expect China’s coal and power supply crunch to persist into the winter,” said Tracy Xian Liao, a commodities strategist at Citi.

Beijing has already been rationing power for industrial use in favour of residential consumption. Liao said that a months-long energy crisis could force authorities to mandate a further 12 per cent cut in power generation for industry in the fourth quarter, “with more cuts needed for a cold winter in order to secure basic winter coal burn”.

“This would increase stagflation risks and growth pressures on the Chinese and global economy over the coming winter,” she added.

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Only about 10 per cent of China’s coal supply is imported. Some regions have vowed to increase purchases in response to the power shortages.

China imported 32.9m tonnes of coal in September, 76 per cent more than during the same month last year, according to customs data released last week.

However, international prices are also at record levels, and last year China banned state-owned companies from importing coal from Australia in a geopolitical spat, further straining fuel supplies.