Chinese coal futures drop under threat of state intervention in energy crisis

Chinese coal prices have fallen amid fears of government intervention in the struggling energy sector, as Beijing seeks to contain electricity costs and stem a crisis that has hampered economic growth from the country.

Thermal coal futures traded on the Zhengzhou Commodity Exchange, which hit record levels in recent weeks, fell an 8% high on Wednesday for the second day in a row to 1,755 Rmb ($ 274) per tonne. The CSI Coal index of large miners listed in China fell 8.5%.

The retreat came a day after China’s National Development and Reform Commission said it would “consider specific measures to intervene” if coal prices continued to rise, adding that it had organized a meeting with the largest coal producers in China.

Soaring coal prices have prevented many Chinese coal-fired power plants from making profits in recent months with low electricity prices, forcing them to cut back on production and leading to widespread electricity shortages.

The NDRC statement was the first official intervention signal on coal prices, which have risen 107% since early September.

China depends on thermal coal for the majority of its electricity, but Beijing has closed coal mines for pollution and safety reasons, while local governments have limited the use of thermal coal this year in an effort to meet strict emissions targets. This contributed to a shortage of domestic supply and caused prices to skyrocket as winter approached.

To fight the crisis, Beijing has ordered the mines to increase production. But erratic weather conditions and flooding in Shanxi, China’s largest coal-producing province, have hampered attempts to increase production.

China has also introduced market reforms to encourage power generation, including forcing all coal-fired power producers to sell in the wholesale market, allowing electricity prices to rise up to 20%. % and lift price caps for certain heavy users.

But many analysts expected the supply deficit to persist at least until the end of the year, weighing on economic growth in China and the world.

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

Beijing has already rationed electricity for industrial use in favor of residential consumption. Liao said a multi-month energy crisis could force authorities to impose a further 12% cut in electricity production for the industry in the fourth quarter, “with more cuts needed for a cold winter to ensure the combustion of basic coal in winter “.

“This would increase the risks of stagflation and growth pressures on the Chinese and global economy over the coming winter,” she added.

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Only about 10% of China’s coal supply is imported. Some regions have pledged to increase their purchases in response to power shortages.

China imported 32.9 million tonnes of coal in September, 76% more than in the same month last year, according to customs data released last week.

However, international prices are also at record highs, and last year China banned state-owned companies from importing coal from Australia in a geopolitical conflict, further straining fuel supplies. .

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