our new study, An Analysis of Coal Price Trends in China, shows that the rapid increase in China’s coal prices since June 2016 was mainly driven by shrinking domestic supply due to China’s effort to cut overcapacity in the coal industry.
In order to stabilize coal prices, the Chinese government is taking measures to increase supply and is encouraging coal and power companies to sign long-term supply contracts.
In the long term, China’s coal demand will stabilize at around 4 billion tonnes, which can be fully met by domestic supply. As China reaches a balance in domestic coal demand and supply, the coal price and coal imports will decline.
Driving factors behind China’s recent coal price surge
- There was no obvious growth in demand or production costs to support the recent price increase. The main cause was government policies designed to combat overcapacity that eliminated more than 200 million tonnes of supply and cut annual work days for coal companies from 330 to 276. As a result, coal output dropped by over 10%, creating a 222 million tonne gap between production and consumption in the first three quarters of 2016.
- High temperatures across China since July 2016 caused an increase in domestic power consumption which further contributed to the price increase.
- Transportation issues caused by heavy rainfall and strict rules on road overloading limited transportation of coal.
Analysis of future coal consumption in China
China’s coal consumption has been steadily declining in the past few years with the first decline of 2.9% in 2014 followed by 3.7% in 2015. In the first three quarters of 2016, this trend continued and coal consumption decreased by 68 million tonnes or 2.4%. China’s energy consumption per unit GDP has also been declining. China will gradually shift away from high energy consumption and increase the proportion of non-fossil fuels in its energy mix.
- China has increased regulation in the thermal power sector, which accounts for around half of China’s coal consumption. The approval of planned thermal power projects and projects that have not yet started construction will be suspended.
- In 2015, the steel sector accounted for 15.8% of total coal consumption. Crude steel capacity will be cut by 12% to 19% in the next five years, which means coal demand will decline as well.
- Coal demand in the construction materials sector, which accounted for 13.2% China’s total coal consumption in 2015, has already begun to peak and will gradually decline.
Forecast of China’s coal import demand
In the long run, China’s coal demand will stabilize, and domestic coal supply will meet the country’s demand. This analysis shows that China’s demand for imported coal will decline in the years to come. China’s coal capacity is currently around 5.7 billion tonnes, of which 800 million tonnes are illegal projects. About 310 million tonnes have been closed, leaving 4.6 billion tonnes of compliance capacity in 2015, which can fully meet China’s projected 4 billion tonnes of consumption demand.
- As the policy on capping total coal consumption in southeastern coastal areas is implemented and coal consumption shifts west towards China’s coal production sites, the market for imported coal will decrease.
- China has introduced several measures to control sulphur and heavy metal content in commercial coal. These measures extend to customs clearance and increases operational risk for countries exporting coal to China. Furthermore, Tariff rates implemented in 2014 and RMB devaluation have weakened the price advantage of imported coal.
WU Lixin, QIN Rongjun and REN Shihua, Coal Strategic Planning Research Institute | China Coal Research Institute