Ukraine war helps China's coal addiction stack up

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HONG KONG, June 2 (Reuters Breakingviews) - Russia’s war on Ukraine is blackening China’s decarbonisation drive. President Xi Jinping’s administration is ramping up domestic output to avoid power cuts, embracing the fossil fuel more tightly as wealthy nations bid aggressively to replace Moscow’s natural gas supplies. It’s a rational financial choice for the top polluter.

Europe’s scramble for alternatives to Russian gas is causing global prices to soar, diverting shipments from Asia. April imports of liquified natural gas (LNG) into Europe and Turkey jumped 20% from the previous month to a record 11.59 million metric tons, according to S&P Global Commodity Insights. Buyers are shunning Russia’s piped supply and those from Poland and elsewhere are being cut off for refusing to pay in roubles. The benchmark front-month gas contract hit around 87 euros/MWh on Tuesday, up about 250% compared to May 2021.

While China has scooped up deeply discounted Russian oil, gas and coal, official data shows the country’s wider overall imports of all three have fallen between January and April year-on-year, despite a slight increase in power generation over the period. So even if domestic demand remains subdued as Covid-19 lockdowns ease, China could face power shortages during the northern hemisphere summer. That would be a political red line that Xi has warned officials against crossing after pursuit of carbon reduction goals contributed to last year’s embarrassing power crunch.

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Turning back to its own rich and cheap reserves makes economic sense: China relies on coal for 60% of its energy, of which domestic output accounts for 90%. By consolidating state giants including China Shenhua Energy (601088.SS), Beijing has increased its control over the sector. Since May, China’s benchmark 5,500 kilocalorie per kilogram thermal coal at the Qinhuangdao Port has been capped at 1,155 yuan ($173) a tonne for spot cargoes, less than half the price of a close equivalent exported out of Australia’s port of Newcastle.

China’s new goal to add 300 million tonnes of coal capacity this year, a 7% annual jump in output, is translating to rigid daily production targets in the main producing provinces such as Inner Mongolia. Meanwhile, power generating companies including Datang International Power Generation (601991.SS) are investing in new coal-fired plants. Barring breakthroughs in carbon capture technologies, the world will struggle to both isolate a key gas provider and reduce emissions.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

China's cabinet announced a package of fiscal, financial, investment and industrial policies on May 31 to revive its pandemic-hit economy, including measures to “accelerate the release of high-quality production capacity of coal mines”.

Russian state gas producer Gazprom turned off its supply to top Dutch trader GasTerra on May 31, exacerbating Europe’s energy crisis.

China's imports of liquefied natural gas are on track to post their first major decline this year, Reuters reported on May 27.

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Editing by Una Galani and Katrina Hamlin

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