How will China’s new energy policy affect the coal market?

Chinese President Xi Jinping told a United Nations General Assembly on September 21 that China will stop building new coal-fired power plants abroad as part of its transition to carbon neutrality by 2060.

Beijing wants to encourage the use of renewable energies and restrict the use of fossil fuels in homes. But China remains the world’s largest consumer of coal and relies heavily on coal-fired power plants to generate electricity.

Following President Xi’s speech, the state-owned commercial bank Bank of China announced on September 24 that except for completed projects, it would no longer fund new coal and power projects in the coal abroad from the fourth quarter of 2021.

During the 14th Five-Year Plan 2021-2025, the bank plans to cut funding for energy-intensive industries and increase support for green projects such as emissions reduction technologies.

China’s demand for coal surges in 2021

Despite China’s ambition to reduce its coal consumption in its country, growing domestic demand has made it difficult to reduce.

According to Chinese industry organization National Energy Administration (NEA), the country’s electricity consumption for the month of August increased 3.6 percent year-on-year to 760.7 billion kilowatt-hours (kWh). Total consumption in the first eight months of this year jumped to 5,470.4 billion kWh, an increase of 13.8% compared to the same period in 2020.

The increase in energy use is due to the recovery of the Chinese economy, with manufacturing continuing to accelerate following the shutdowns triggered by COVID.

China’s coal imports fell 10.3 percent year-on-year to 197.7 million tonnes in January-August, according to Chinese customs data. The country made up for this deficit by increasing national production.

According to the National Bureau of Statistics (NBS), China’s coal production reached 2.6 billion tonnes in the first eight months of 2021, up 4.4 percent from 2020.

Strong demand amid an electricity shortage in China is behind the high consumption of coal this year. The NEA said at a press conference on July 29:

“Global energy supply and demand are in a tight balance. Since the start of this year, China’s electricity base load has hit an all-time high year-over-year for six consecutive months. Some regions have adopted measures for orderly electricity consumption.

The NEA said that despite the growing demand for energy and the limited supply of coal, the country has made efforts to increase domestic production.

In response to the strong demand for coal from China, the thermal coal market has reached record levels. Newcastle coal futures (traded on the Intercontinental Exchange) for delivery in January 2022 closed at $ 180.60 per tonne on September 24. Global thermal coal prices hit new records in the second half of this year.

Due to this strong demand, the mining industry remains optimistic about the future of the coal market, despite China’s plan to reduce coal consumption.

In addition, the most coal-consuming countries, especially in Asia, are expected to reopen their economies, further supporting the market. The International Energy Agency (IEA) predicts demand for coal will grow 4.5 percent year-on-year, with China accounting for more than 50 percent of that growth.

China remains committed to decarbonization

Despite the recovery in the coal market and strong short-term demand, China remains committed to its long-term decarbonization plan, accelerating the pace of the transition to green energy.

“China alone is likely to account for nearly half of the global increase in renewable electricity generation,” the IEA said in its Global Energy Review.

According to the IEA, China is expected to produce more than 900 trillion watt-hours (TWh) of electricity from solar photovoltaic (PV) and wind power in 2021, the European Union around 580 TWh and the United States 550 TWh. Together, they represent nearly three quarters of the world’s solar photovoltaic and wind production.

Several renewable energy projects in China have started operating this year, demonstrating the country’s commitment to move away from coal.

Two hydropower projects – the first phase of the one million kilowatt Baihetan hydropower plant and the Wudongde hydropower plant – began operating in China this year.

Several nuclear reactors at nuclear power plants in Hualong and Tianwan have also started to generate electricity. The construction of a new nuclear project in Hainan Changjiang has been approved.

According to the NEA, China’s installed power generation capacity reached 2.28 billion kilowatts in January-August, up 9.5% from the same period in 2020. The installed capacity of China Wind power was about 300 million kilowatts, up 33.8% year-on-year. The installed solar power capacity jumped 24.6% to 280 million kilowatts. Hydroelectric capacity increased by a more modest 4.9% year-on-year to 38 million kilowatts.

Although the capacity of Chinese coal-fired power plants continues to increase, the growth rate has been limited by the country’s decarbonisation plan. The capacity of coal-fired power plants increased 3.8 percent year-on-year to 1.28 billion kilowatts in the first eight months of 2021. During this period, coal-fired power generation accounted for 56 % of the county’s overall electrical capacity.

Demand and prices for coal are expected to decline in the longer term

British multinational oil and gas company BP (BP) estimates that China-led global coal consumption will decline steadily over the next 30 years.

The company has developed two main scenarios – Rapid and Net Zero – to imagine the possible futures of the energy market. In Rapid, the transition to a low carbon energy environment is accelerated. Net Zero envisions almost complete elimination of carbon in power generation.

In the report, BP said that in both scenarios: “Coal is almost completely eliminated from the global energy system over the next 30 years, falling to between 85 and 90%, the share of coal in primary energy [resources] fall to less than 5% by 2050.

The company added:

“The drop in demand for coal at Rapid and Net Zero is being dominated by China as it shifts to a more sustainable growth model and a lower carbon energy mix. Declines in coal consumption in China explain about half of the overall drop in global demand in these two scenarios, supported by declines in the OECD, India and other Asian countries.

Therefore, coal prices are also expected to decline in the longer term.

Consultancy Fitch Ratings estimates that average Australian coal prices at Newcastle FOB will fall to $ 87 per metric tonne in 2022, from $ 115 in 2021. The downward trend is likely to continue in 2023, with coal prices forecast at $ 72 , falling to $ 66 in 2024.

Read Capitals.com’s latest coal price forecast to learn more about the market outlook.

Edited by Valérie Medleva

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