China is reeling under a significant power crisis. There is a shortage of coal to produce electricity. Many regions have been instructed to ration power in a bid to manage the issue; a move expected to affect the country’s economic growth this year. Though Beijing has ordered mines to increase the production of coal, heavy rains and floods have worsened the situation.
Two of the largest coal-producing regions in China, Shanxi province and Inner Mongolia, have been asked to increase annual coal production capacity by over 160 million tons. In Shanxi, 98 coal mines were instructed to raise annual coal production by 55.3 million tons for the rest of 2021. An additional 51 coal mines that have hit the maximum allowable annual production are now allowed to increase output by eight million tons for the fourth quarter.
In Inner Mongolia, 72 mines have been allowed to operate at higher capacities. “The [government’s] coal task force shall urge miners to raise output with no compromise, while the power task team shall have the generating firms guarantee meeting the winter electricity and heating demand,” a local newspaper said.
Despite efforts to increase production, rain has wreaked havoc in Shanxi, a province that accounted for 30 percent of the country’s coal supply this year. Heavy floods have forced 60 of the 682 mines in the province to shut down. Wang Yixin, vice governor of Shanxi, has asked state-owned companies in the province to ensure a stable coal supply “without regard to conditions.”
The rising coal consumption in northwestern China is complicating matters even further. The winter season has hit the region. However, major power plants now only have 10 days’ worth of stockpiles available as opposed to the 20 days worth of stockpiles in inventory in 2020.
The coal shortage crisis is so severe that Beijing has been forced to allow Australian coal from bonded storage into the market even though it had imposed an unofficial ban on coal imports from the country for almost a year. Bonded storage in this situation refers to Australian coal shipments that had arrived in China but were blocked by officials. These supplies were not allowed to be released into the market.
“The embargo still applies – there has been no policy change to allow coal to be imported – but there have been Australian cargoes offloaded but not distributed. Customs is now allowing those to be cleared through port… The pressure domestically on coal supplies is enormous,” a senior coal industry executive told the Financial Review.
Analysts at Citic Securities predict a coal supply gap of 30 to 40 million tons in the fourth quarter. A fuel shortage can cut down on industrial power use by 10 percent in November and 15 percent in December. As a result, energy-intensive industries like cement, steel, and chemicals can see a 30 percent slowdown in activity. This would inevitably have repercussions on the economy.
“China’s electricity cuts will add to economic stresses, weighing on [gross domestic product] growth for 2022. And the risks to [gross domestic product] forecasts could be larger as disruptions to production and supply chains feed through,” Moody’s Investors Service said in a report.
Citi estimates China to suffer a 12 percent reduction in industrial power use in the fourth quarter that will increase the risk of stagflation and put further pressure on the country’s growth rate.