What does China’s coal shortage mean for trade?

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Hello from Hong Kong, the quarantine restrictions for senior directors of large listed companies have been relaxed. But our main work today is not about the flow of people, but about the flow of energy in the era of environmental transformation. Few people predict a future in which the role of coal will not decline sharply. But for the time being, to put it mildly, the prospects are fuzzy.

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The link between trade and coal prices

Dealing with record commodity prices is the idea of ??the Chinese Communist Party’s senior management. This raises questions about the country’s main energy source: coal production and trade.

At a state meeting chaired by Chinese Premier Li Keqiang last monthIn particular, there is a line that will jump out to environmentally conscious observers: the idea of ??developing the country’s “rich coal resources”.

In September last year, China announced its commitment to achieve net zero carbon emissions by 2060. But it still relies on coal to generate electricity, and currently, it needs more coal.

“In the past few months, the prices of almost all energy sources, including coal, oil and natural gas, have risen rapidly, which has prompted the Chinese government to prioritize energy security concerns and reduce fossil fuels such as coal and natural gas,” the analysis Teacher Cindy Liang said. S&P Global Platts Energy News, late May.

Like many other commodities, coal prices have soared recently. Broader raw material price increases have heightened concerns about inflation in China, and the same State Council meeting emphasized the need to prevent them from affecting consumer prices.

One of the main reasons for the soaring coal price is the shortage in China, which is the world’s largest coal consumer. Morgan Stanley analysts pointed out that due to the country’s rapid recovery, electricity consumption in April increased by 14% year-on-year.

Coal production has also risen 16% in the first quarter Compared with the same period last year, despite the pandemic, the mine was closed in early 2020. But despite the increase in production, supply is still under pressure to keep up with higher demand.

At the same time, domestic producers must comply with a stricter environmental background, even if there are still decades to achieve long-term goals. Morgan Stanley pointed out that “domestic coal supply continues to be under pressure from safety and environmental inspections.” Argus analysts, who expect coal consumption to increase in the future, also made a similar point.

“Market participants expect that the government will not allow a substantial increase in production until the 100th anniversary of the founding of the Communist Party of China is celebrated on July 1,” they wrote on Friday. “In fact, even after the celebrations, strict environmental and safety restrictions may continue to exist as long-term rules.” The State Council meeting not only emphasized coal production, but also emphasized wind, solar, hydraulic and nuclear power.

How does trade adapt to this dynamic? Despite the shortage, China’s thermal coal imports, which operate under the quota system and account for only a small portion of total consumption, have fallen by nearly a quarter so far this year. This is partly due to the deteriorating geopolitical relationship between the two countries that has led to restrictions on Australian coal.

Although prices are rising all over the world, foreign coal is much cheaper. In Australia, the active futures contract for thermal coal production reduction in Newcastle is US$115.6 per ton. In May, thermal coal futures on the Zhengzhou Stock Exchange broke through the 900 yuan (141 US dollars) mark firstAs shown in the chart below, this price difference has been going on for many years.

Line chart shows that Chinese coal prices are higher than foreign substitutes

In this context, it seems tempting for China to import more coal or at least avoid further cuts in imports. Data from S&P Global Platts shows that quotas limit imports to only 300 million metric tons per year, compared with 3.81 billion tons of output last year. But another related development is its efforts to reduce dependence on other countries, which may explain the emphasis on its own resources.

Matthew Boyle, head of coal and Asian power at S&P Global Platts Analytics, predicts that China’s coal production will peak in 2023. He said that China continues to purchase coal from South Africa and other countries, but the country is moving towards greater energy independence.

This ambition also plays a role in natural gas, and long before China’s coal consumption drops significantly, it may point to a clearer trajectory for coal trade. “As China gradually realizes self-sufficiency in coal demand,” he said, “its demand for seaborne coal will decrease.”

Trade ties

Tensions between Washington and Beijing After the Biden administration, this morning went up another level Say It is considering whether to investigate the import of rare earth neodymium magnets from China. The investigation will investigate whether tariffs can be imposed for security reasons.Read as you Profile of Ed White China from Seoul will recall last week Leading the processing of minerals and rare earths It is essential for the production of products such as mobile phones and electric vehicle batteries.

The relationship between the European Union and the United Kingdom Northern Ireland Protocol It also looks unstable, Brussels is now threatening to Step up action.

There are a few interesting readings?? Semiconductor chip. A big question after the pandemic will be whether the number of car manufacturers will decrease Rely on just-in-time productionWhen the shortage came, they had almost no chip inventory. Bosch, Europe’s largest automotive supplier, think The industry must change its strategy and warn automakers that they must put “money on the table” and make “rock-solid” commitments to orders to avoid repeating the events of the past year.There may be more troubles in the future like European automakers Covid-19 broke out in Taiwan, Here is where many of the largest players in the chip manufacturing industry are located.As Catherine Hiller write, This is unlikely to directly affect large manufacturers like TSMC, but it may affect smaller groups responsible for packaging products.Nikkei also has interesting Take ($, subscription required) in Vaccination crisis This is caused by the recent surge in cases.

At the same time, industry groups from Japan and Finland Will proceed Joint research and development of the sixth-generation communication technology, looking forward to leading the creation of 6G standard In an area that is increasingly influenced by Chinese companies. (Nikkei Index, USD)

Chad Bown of Peterson Institute and Chris Rogers of S&P Global Market Intelligence have one New blog is out, Which assumes The U.S. does not ban the export of vaccines to IndiaHowever, they believe that the chaos highlights why a well-thought-out global vaccine supply chain is so important.The post is summarized in a Twitter thread Here and also. Claire Jones

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