China announced it will establish a backup coal production system by 2027 to stabilise prices and secure coal supply, and aims to have 300 million metric tons of “dispatchable” coal production on hand by 2030.
As China produces over 4 billion tons of coal each year, the direct operational impact of creating an additional reserve of around 7%-8% of total output may not be a major challenge for the world’s largest coal miner and consumer.
But there will likely be other far-reaching implications as this backup supply base is created, extending from China’s least efficient domestic coal mines to the world’s largest coal exporters in Indonesia and Australia.
POTENTIAL IMPORT CUTS
The biggest international consequence of the move to create the reserve may be to reduce China’s total coal import requirements.
As the world’s largest coal importer, China has imported an average of nearly 27 million tons of the fuel source in each of the first 11 months in 2023, and is on track to surpass 300 million tons for the year as a whole, according to Kpler.
Some of the imported supplies are of a higher quality than much of China’s domestically mined coal, and so play an important roll in upscaling the coal mix used by some of China’s most modern coal-fired power plants which are under pressure to reduce emissions and boost power output.
Many of China’s main coal plants are also located along the coast, and so are often more easily resupplied by international bulk vessels than via train cars that must snake their way from interior coal fields in Inner Mongolia and the Shanxi and Shaanxi provinces.
Nonetheless, much of China’s coal import appetite is driven by the price spread between domestic and international coal grades, with imports usually boosted whenever local prices rise and narrow the difference between global and local market rates.
As the main motivations of the new coal reserve are to place a cap on local prices and reduce their overall volatility, the buildup of the reserve is likely to have a suppressing effect on China’s coal prices, which in turn may reduce the appeal of imports over time.
For the world’s largest coal exporter, Indonesia, the prospect of a new coal supply buffer within its top market will likely be a cause for concern, as China accounts for over 40% of total Indonesian shipments this year.
To ensure Chinese power stations remain steady customers, Indonesian exporters may need to price their cargoes not just against rival suppliers in Australia, Russia, South Africa and elsewhere, but also against domestic miners who themselves may face downward price pressure from the mounting reserve base.
That in turn means that major international coal prices may be pulled lower by the buildup of China’s new coal reserve, placing pressure on global coal exporters who will remain heavily dependent on China’s continuing appetite for coal over the coming decades.
LOCAL FALLOUT
China’s local coal miners will also be affected by the reserve plans.
The draft rules issued by the National Development and Reform Commission (NDRC), China’s state planner, did not provide many details on how the reserve will work, but did state that mines with at least 3 million tons of annual production capacity can apply to be included.
That indicates that China’s larger tiers of coal miners may need to cordon off sections of potential output for use as reserve supplies, while also maintaining their normal operating bases to deliver steady supplies onto local markets.
The creation of this pool of reserve tonnage, which may go unused for months at a time, may in turn place strain on certain mine operations that are already dealing with grade depletion following decades of production.
Supply opportunities may therefore emerge for China’s smaller coal miners, which are often squeezed out by larger rivals but may now find themselves able to profitably supply tons to any local buyers that get shortchanged by larger miners actively building up the required reserve stash.
However, those smaller players may be able to supply only lower-grade coal than their larger peers, which may diminish the quality of the coal blend available for power producers.
Lower-quality coal burned in power stations may in turn lead to higher pollution from China’s power sector, and worsening air quality across areas with dense networks of coal-fired plants.
The rapid ongoing development of clean power supplies may allow China’s power producers to reduce coal’s share of the overall electricity generation mix, and thereby avert any sharp surge in coal-related emissions.
But the continuing electrification of China’s car fleets, factories, offices and homes will also push total electricity demand steadily higher, ensuring that coal will remain a critical pillar of its energy system.
That enduring important role for coal underscores the rationale behind Beijing’s move to create a reserve base, but likely means widespread implications for global coal markets while the reserves are built up.
