More Chinese provinces are considering electricity rationing because of a surge in consumption and tighter coal supplies for power generation.
This comes after similar measures were introduced in the southern provinces of Guangdong and Yunnan last month, highlighting the severity of China’s coal supply shortfall, which has caused electricity generation costs to rise above the base tariff for coal-fired electricity in some regions. The country’s peak summer coal demand season has yet to start in earnest, potentially indicating that the shortage may worsen.
The Guangxi branch of state-owned utility the China Southern Power Grid was instructed by local energy regulators at a recent meeting to monitor electricity consumption by factories and focus on increasing renewable energy output to counter a worsening power supply crunch. But authorities during the meeting did not address the crucial issue of raising coal supplies for Guangxi province to ease the electricity shortfall.
Other provinces such as Guizhou, Shaanxi, Shanxi have also recently issued notices of possible electricity rationing. Some of these are major coal-producing regions.
Chinese coal importers have struggled to procure sufficient seaborne coal to offset the domestic supply crunch since Beijing informally banned Australian coal last year, after Canberra called for an investigation into the origins of Covid-19. China imported 21.04mn t of all types of coal in May, down by 4.6pc on the year. This took its total January-May imports to 111.17mn t, down by 25.2pc on the year.
Non-Australian suppliers raise prices
Beijing’s informal ban on Australian coal has given non-Australian producers significant leverage to raise prices for supplies to Chinese consumers.
A June-loading 45,000t cargo of Russian NAR 5,500 kcal/kg was sold to a Chinese consumer at $118/t cfr east China, netting back to around $103.85/t on a fob Vladivostok basis. This is significantly higher than the latest Argus assessment of Australian NAR 5,500 kcal/kg at $70.10/t fob Newcastle on 4 June. Freight rates for a Capesize vessel from Newcastle to east China are around $14/t, suggesting a discount of nearly 30pc compared with Russian material.
The arbitrage spread between Russian and Australian NAR 5,500 kcal/kg coal has narrowed from nearly 50pc earlier in May because of a surge in demand from northeast Asian markets such as Japan, South Korea and Taiwan for Australian cargoes, which has pushed up prices to multi-year highs.
A temporary removal of quota restrictions on coal imports for some Chinese provinces until the end of June may backfire because the measure does not address the root cause of China’s supply crunch, which is the informal ban on Australian material.
Some sellers with Russian and Indonesian cargoes have raised offer prices to Chinese buyers on expectations of a surge in bids following the latest measure to ease import restrictions, according to market participants. But domestic spot prices in China have not risen sharply because of recent government interventions. This has prevented an arbitrage window wide enough to encourage more seaborne purchases, which will likely extend the trend of lower imports into June.
Meanwhile, firm demand from northeast Asian countries such as Japan and South Korea ahead of any further rebound in Chinese summer demand is diverting seaborne cargoes there while some Chinese importers hesitate to make purchases for now. But Chinese importers may soon run out of options because of limited seaborne cargoes from alternative coal-exporting countries such as Indonesia in the absence of Australian coal and competition for supplies from buyers in other northeast Asian countries.