Price of coal futures in China surges as heavy rains force mines to close, worsening country’s energy crisis

Torrential rains in one of China’s northern provinces have forced coal mines to shut down, worsening the communist nation’s energy crisis and leading to a spike in coal futures.

Shanxi, around 300 miles to the southwest of Beijing, has experienced record-breaking rainfall over the weekend. This has led to over 120,000 people being evacuated from flooded areas and more than 469,500 acres of crops being damaged.

The situation in Shanxi has also complicated matters severely for the province’s mining industry, which supplies up to 30 percent of all coal used domestically. According to the latest reports, 60 of the 682 coal mines in Shanxi have shut down due to rain and flooding.

The shutdown of nearly nine percent of Shanxi’s coal mines has complicated the Chinese government’s efforts to boost coal output and ensure that the country has enough electricity for the coming winter months.

In China’s finance industry, the market has reacted to the coal crisis with a record-breaking surge in coal futures. In the Zhengzhou Commodity Exchange, one of only four legally sanctioned futures exchanges in mainland China, coal futures climbed 11.6 percent to close at an all-time high of 1,408.2 yuan ($218.76) per ton.

Spot prices are even more expensive. Orders of coal coming in from the port city of Qinhuangdao are selling at around 1,900 yuan ($294.29) for 5,500 kilocalories of coal.

According to Feng Dongbin, an analyst for China Coal Resource, a coal industry analysis website, coal prices are expected to peak at around 2,000 yuan ($309.78) before falling back to around 1,000 yuan ($154.89) sometime in the first quarter of 2022.

China’s energy crisis caused by multiple factors

China’s energy crisis is not suddenly triggered by the record-breaking rainfall and flooding in Shanxi. These are just the most recent problems compounding the fragile energy situation in the communist nation.

Other factors have contributed greatly to the current state of power generation in the country. This has led to power rationing for the commercial and industrial sectors, and it is starting to increasingly affect residential users.

These factors include the increase in international and domestic coal prices coupled with strict government-ordered caps on how much electricity producers can charge consumers, including during times of crisis. This has made it financially unviable for many corporations in the coal industry to continue operating, leading to many closures of coal-fired power plants.

A recent campaign against companies in the coal industry engaged in acts of corruption with local officials has also led to significant reduction in the production of coal-derived energy.

Hudson Lockett and Primrose Riordan, writing for the Financial Times, have also ascribed some of the blame for the current energy crisis to China’s recent drive to meet its overly ambitious green energy goals. This has led to coal mines and coal-fired power plants shutting down to reduce air pollution during large-scale events that attract the attention of international media outlets, such as national holidays.

Other once-in-a-lifetime weather events have also contributed to the energy crunch, including the unexpectedly dry weather in China’s southern regions that hobbled the production of hydroelectric power.

Chinese government intervenes in an attempt to solve energy crisis

The State Council, China’s chief administrative authority, has stepped in to try and deal with the energy crisis. In a bid to boost energy production, it announces that it will allow electricity generators using coal to increase their prices by as much as 20 percent against the benchmark.

It adds that it will gradually liberalize its coal industry, starting with allowing all of the country’s coal-fired power plants to be traded in the market. This would free these corporations from the strict price regulations that have hobbled growth and made it unviable for them to keep producing essential power.

The State Council has asked the coal industry to spare no costs in increasing the country’s coal supplies. The council has also given coal mine operators permission to continue operating at full capacity even after hitting their annual quotas.

Even with these efforts, China is still expected to experience a coal supply gap of between 30 to 40 million tons of coal in the fourth quarter.

If this energy crisis is not dealt with soon, financial analysts believe the impact of these disturbances in China’s energy markets could spread beyond its own borders. (Related: The Chinese energy crisis is spilling over into Europe: Is the U.S. next?)

“We expect the power cuts and resulting production disruptions to be temporary,” says Michael Taylor, chief Asia-Pacific credit officer for credit rating company Moody’s. “But if they continue for an extended period, such as into winter, the effects will spread across the domestic – and potentially global – economy.”

Taylor points out that a prolonged energy crisis in China would cut into factory output. This could “disrupt supply chains across the Asia-Pacific given prevailing linkages, which will also increase prices along the chain,” Taylor says.

Sources include:

ZeroHedge.com

Bloomberg.com

FT.com