Commentary on Political Economy

Wednesday 29 September 2021

China braces for a chilly winter as its home-grown energy crisis intensifies

Stephen Bartholomeusz

The energy crisis engulfing the UK and Europe is being driven by the global shortages and soaring costs of gas and oil. In China, it’s coal-driven and is largely the result of decisions made in China.

Two-thirds of China’s provinces are now rationing power. Factories have closed or have reduced production. Households are going dark and street lights have been turned off. Demand for candles has soared. The impact on food processors is creating a threat to food security.

There is no simple solution for China’s energy crisis.

There is no simple solution for China’s energy crisis.CREDIT:AP

Heading into a winter that is typically extremely cold, China is facing threats to its people and its economy that have no quick or easy solutions.

While there is some commonality in the issues confronting the UK, Europe and China – the interaction of responses to climate change with a shortage of oil and gas supply relative to the rebound in demand as the world bounces back from the worst impacts of the pandemic (and the consequent surge in LNG and oil prices) – the core elements of China’s difficulties are homegrown.


Nearly 60 per cent of China’s power is generated by coal, with about 90 per cent of that coal sourced domestically.

It was coal that powered China’s remarkable acceleration in economic growth over the past half century, which helped turn it into the world’s manufacturing base and which fuelled the decades-long construction and property booms at the heart of its domestic economy.


The UK is going through a fuel crisis.



The energy crisis wreaking havoc across the globe

Stephen Bartholomeusz

Stephen Bartholomeusz

Senior business columnist

The seeds for the current crisis were largely sown within the five-year national strategic plan that ran from 2016 to 2020. Within that plan was the ambition of capping China’s energy requirements and carbon emissions and reducing the energy intensity of its economy.

Those goals were imposed at the same time as China was trying to reduce pollution, lift the productivity of its industrial base and reduce a horrific rate of deaths and injuries in its coal mines by forcing the closures of smaller and low-quality domestic coal producers.


The more recent introduction of non-negotiable emissions-reduction targets to try to deliver Xi Jinping’s commitment to reducing energy intensity by three per cent this year, achieving peak carbon by 2030 and reaching carbon neutrality by 2060 has overlaid a shortage of coal supply and the rising cost and declining quality and volume of China’s domestic coal resources.

To try to achieve those targets, mines were closed or ordered to reduce production and heavy energy users like steel mills and aluminum producers were also forced to cut their output (hence the collapse in the iron ore price and the highest global prices for aluminium in more than a decade).

Local governments have struggled to comply with Beijing’s directions – many are said to have ignored them in pursuit of energy-intensive growth and the revenue and employment that generates – and are now resorting to power cuts and blackouts because of the shortage of coal.

Two-thirds of China’s provinces are now rationing power.

Two-thirds of China’s provinces are now rationing power.CREDIT:BLOOMBERG

The pandemic, which saw demand for coal slump, and the global antipathy to new production haven’t helped China’s power supply challenges.


Nor has China’s effective ban on Australian coal. While Australia only supplied about two per cent, or about 50 million tonnes a year, of China’s energy coal requirements the quality and cost of the coal – its higher calorific values and lower sulphur content – meant it was the benchmark for regional pricing.


“If G20 countries – including Australia - choose business-as-usual, climate change will soon send Australia’s high living standards up in flames,” says Selwin Hart, a top climate adviser to the UN Secretary-General.


Coal prices are roaring back amid a global energy crunch

When China imposed the ban in the second half of 2020 – in the midst of the worst of the pandemic – the price of Australian thermal coal slumped to about $US55 a tonne. China, however, was forced to source the replacement supply from South Africa, Indonesia, Russia and North America, driving the prices for inferior coal imports up dramatically.

After the initial shock the Australian producers quickly diverted their output to new markets, some of them impacted by China’s diversion of traditional coal trades, and the price rebounded even as the global economy and its demand for coal recovered.

The price of Australian thermal coal is currently at record levels above $US200 a tonne while China has been paying significantly more than that for imports of lower-quality tonnes. Its domestic coal prices have almost doubled from a year ago and are up about 40 per cent over the past six weeks.


Confronted with the surge in prices its power generators have cut back on their purchases and left China with only about two weeks’ worth of reserves. The caps on the prices they can charge mean that many, if not most, would operate at a loss if they keep operating at full capacity.

Beijing’s response has been to try to import more coal, at the vastly higher prices, and increase its imports of LNG.

That is contributing to the global surge in the demand for gas and the resultant surge in its price at a time when Russia is focused on increasing its domestic reserves and US production has been affected by hurricanes and the impact of the pandemic on its onshore oil and gas production.

Beijing will inevitably have to do whatever it takes, including sidelining its emissions targets until it gets the supply/demand equation into better balance and is able to maintain power through the looming winter to keep the lights and heating on.

The central authorities are also mulling over a relaxation of the price caps for industrial users, allowing the generators to charge prices that reflect the increased cost of their inputs and providing an incentive for them to restore their own output.



The start of the rolling assault came after Alibaba’s Jack Ma made some derisive public comments about China’s financial system, its regulation and the big state-owned banks within it last year.


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Stephen Bartholomeusz

Stephen Bartholomeusz

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That would, of course, increase the demand for coal and be reflected in even higher coal prices but Beijing will inevitably have to do whatever it takes, including sidelining its emissions targets until it gets the supply/demand equation into better balance and is able to maintain power through the looming winter to keep the lights and heating on.

An energy crisis, a potential property-driven financial crisis, continuing massive disruptions to the supply chains that connect China’s manufacturing base to the rest of the world and the continuing tensions with the US and its allies are occurring even as Xi is attempting a radical shift in China’s economic model.

What’s that Chinese curse? Xi and the rest of China’s authorities are living through very interesting times.

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