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October 20, 2021

Chinese coal futures slump after threat of state intervention

Chinese coal futures have slumped after fears of state intervention to alleviate pressure on the industry.

By Zachary Skidmore

Chinese coal futures prices have slumped after fears of government intervention. Coal futures fell by 8% to their downward limit on Tuesday, after the state planning authority said it was looking at ways to intervene to bring record coal prices back to a “reasonable range”.

The most-traded thermal coal contract on the Zhengzhou Commodity Exchange, for delivery in January, fell to CNY1,755.40 ($275) a tonne, having touched an all-time peak of CNY1,982 on Tuesday. The CSI Coal index of big China-listed miners also dropped by 8.5%.

The slump came after China’s National Development and Reform Commission said that it would “study-specific measures to intervene” if coal prices continued to rise. The commission also stated it had organised a meeting with China’s biggest coal producers to alleviate pressure on the industry.

“The current price increase has completely deviated from the fundamentals of supply and demand,” the NDRC said. “The heating season is approaching, and the price is still showing a further irrational upward trend.”

Reliance on coal

China is highly reliant on thermal coal for its electricity generation. However, state planners have curtailed coal-derived power by forcibly closing coal mines to meet strict emission targets. This shortfall in domestic supply led Beijing to order mines to boost output. However, recent floods in Shanxi province severely impacted efforts to increase production.

These shortages have led to a greater reliance on imported coal to fill the gap. China usually only imports around 10% of its coal. However, in September, China imported 32.9 million tonnes of coal, 76% more than September last year.

Energy crisis bites

Coal shortages in the country have been caused by a mix of factors, including a surge in demand post-pandemic, low stocks and supplies being hit by extreme weather, and transport-related disruptions. The surge in coal price has, in turn, made it impossible for many of China’s coal-fired power stations to turn any profit, forcing them to cut output, resulting in widespread power shortages.

“We expect China’s coal and power supply crunch to persist into the winter,” said Tracy Xian Liao, a commodities strategist at Citi.

In a separate statement, the NDRC said it would ensure coal mines operate at full capacity and aim to achieve at least 12 million tonnes per day of output. This push to boost supply has included approvals for new coal mines, as Chinese planners attempt to prevent consistent power outages during the winter months.

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