Column: China digs deep to raise coal output to record high

Imported coal is seen lifted by cranes from a coal cargo ship onto a truck at a port in Lianyungang, Jiangsu province, China July 26, 2018. Picture taken July 26, 2018. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT./File Photo/File Photo/File Photo

LONDON, Sept 20 (Reuters) - China's coal production has surged this year as the government seeks to improve energy security by reducing dependence on imports and amassing inventories at power plants.

Raising domestic coal output is consistent with Beijing's broader effort to indigenise supplies of critical energy sources, raw materials and technology.

Production hit a record 2,929 million tonnes in the first eight months of 2022, according to China’s National Bureau of Statistics (“Monthly output of energy products”, NBS, Sept. 16).

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Mine output was up by 332 million tonnes (13%) compared with the same period in 2021 and 520 million tonnes (22%) compared with the last pre-pandemic year in 2019.

Production has been growing faster than coal-fired electricity generation as the government tries to increase fuel stocks and cut reliance on imports (https://tmsnrt.rs/3qQFZPd).

Thermal power generation, nearly all from coal, set a new record of 3,883 billion kilowatt-hours (kWh) in the first eight months of the year.

But thermal generation was up by just 10 billion kWh (0.3%) compared with 2021 and 497 billion kWh (15%) compared with 2019.

Big increases from wind farms, solar farms and, until this summer’s drought, from hydro-electric power plants have also reduced the need to burn more coal.

As a result, coal-fired generators’ share of total electricity production fell to 69% in the first eight months of 2022 from 72% in both 2021 and 2019.

This has meant an improvement in coal stocks held by power producers after they became dangerously depleted last year.

Imports of coal and lignite have also fallen to 168 million tonnes in the first eight months of 2022, from 198 million tonnes in 2022 and 220 million tonnes in 2019.

Some of the reduction is down to disruption caused by repeated lockdowns to control the coronavirus epidemic which has hit iron and steel production.

Coal imports include both high-grade coking coal for blast furnaces as well as lower-grade coal for use in power plants.

But the massive expansion in domestic output has enabled China to raise generation and rebuild stocks without having to source more fuel from exporters.

DROUGHT THREAT

Since the end of June, however, the severe drought that has hit the Yangtze basin has reversed some of these favourable trends and revived concerns about fuel security.

Low levels of hydro generation forced China to rely more heavily on coal-fired units and draw more heavily on coal supplies since the start of July.

If the drought persists, electricity supplies are likely to be especially tight during the winter peak, when hydro and solar output will be lower while heating and lighting loads will increase significantly.

The country is still plagued by transmission constraints, despite a massive build out of west-to-east and north-to-south ultra-high voltage transmission corridors, causing electricity shortages at provincial level.

But without the big ramp up in mine output earlier this year and inventory building during spring and summer, energy supplies would be even more stretched.

As a result, the overall coal and electricity supply situation appears more comfortable than at the same point last year, when coal inventories fell critically low.

In recent days, more normal seasonal rainfall across the Yangtze basin has eased some pressure on water levels, which should also relieve some of the pressure on coal inventories.

Futures prices for coal delivered in December 2022 have dipped to $131 per tonne from $148 earlier this month, although they are still up from $116 at the start of this year.

Related columns:

- China's drought intensifies fears of global coal shortage (Reuters, Sept. 6) read more

- Global 2021 coal-fired electricity generation surges to record high (Reuters, July 21) read more

- China’s lockdowns and heavy rains ease coal shortage (Reuters, June 21) read more

John Kemp is a Reuters market analyst. The views expressed are his own

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Editing by Alexander Smith

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John Kemp is a senior market analyst specializing in oil and energy systems. Before joining Reuters in 2008, he was a trading analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests include all aspects of energy technology, history, diplomacy, derivative markets, risk management, policy and transitions.