Caixin
Oct 08, 2021 05:40 AM
CHINA

China Provinces to Supply More Coal to Ease Power Shortage

A coal mine in Ordos, Inner Mongolia.
A coal mine in Ordos, Inner Mongolia.

Three of China’s major coal-producing provinces have pledged to increase long-term coal supply to power plants by a total of 145 million tons at a discount price in the fourth quarter amid a severe power shortage which has left millions of homes and businesses hit by power cuts.

The pledges came after China’s state planner, the National Development and Reform Commission (NDRC), last week urged miners and power firms to sign up additional long-term contracts on top of existing agreements in order to guarantee thermal coal supply to generate electricity.

Since mid-September, several provinces across the country suffered power outages and were forced to ration electricity supplies. Record coal prices and a relatively low electricity price set by the government have meant that producers have been selling power below cost, which has greatly lowered the incentive to generate electricity. This, together with government-mandated cuts to coal-mining capacity since 2016 and carbon-reduction measures, have slowed coal production, while an economic recovery is making factories consume a lot more electricity.

Nearly 30 coal producers in Ordos, Inner Mongolia, will guarantee 53 million tons of coal supply to 18 provinces, including 13 million tons to three northeastern provinces, where a recent power outage caused 23 deaths. The city produced 604 million tons of coal last year, accounting for about one sixth of the country’s total output.

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Shanxi province, which produces 28% of the country’s coal, has signed long-term contracts with 14 other provinces and cities to supply an extra 53 million tons of coal beyond its existing contracts. Shaanxi province will commit an additional 39 million tons of coal supply to 14 provinces.

The price under long-term contracts is about 60% less than market coal prices. At the end of September, the main trading price of 5,500 kcal/kg thermal coal at major northern China ports stood at about 1,600 to 1,700 yuan ($248-$264) per ton, while Shenhua Group Corp, a state-owned mining and energy company, sold its thermal coals under long-term contracts at 677 yuan per ton.

Due to the large price gap, the implementation of additional long-term contracts with coal mines is not progressing as expected. Coal producers including Shenhua have only executed a small portion of their committed long-term contracts as it’s not easy to organize supplies because the market price is much higher than the contract price, a spokesperson for a state-owned thermal power plant in Jiangsu province told Caixin.

In response to the implementation problem, the NDRC issued a supplemental notice over the weekend, allowing coal mines that supply more than 80% of their output under long-term contracts to raise their price in the additional contracts to no more than twice of its original contract price.

Currently, coal producers mainly adjust their sales structure to achieve the long-term contract goal, such as cutting the proportion of coals sold in the market and reducing sales of coal used in metallurgy, chemical and construction industries, according a person at a major coal producer in Shanxi. “Now we are concentrating on guarantee supply for electricity,” said the representative, who spoke on condition of anonymity.

Meanwhile, power plants are also trying to import more coal. State-owned power producer Zhejiang Provincial Energy Group Co. Ltd. recently imported 136,000 tons of coal from Kazakhstan, local media reported.

Contact reporter Denise Jia (huijuanjia@caixin.com)

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