As the global supply can’t respond so quickly, the price has the potential to skyrocket again. How high it goes depends on how much China is willing to pay. During the previous coal shortage in 2008, China was paying close to US$200 per tonne. As China is much richer now, the price could go much higher.
China’s coal-fired electricity production rose by 12.6 per cent in the first eight months, while coal production was up only 4.4 per cent. The big gap needs to be met by either running down inventory or increasing imports. China consumed 3.8 billion tonnes of coal or 52 per cent of the global total in 2020, according to the International Energy Agency, of which 2.3 billion tonnes was for electricity production.
The gap between electricity demand and coal production works out to a shortfall of 189 million tonnes. China imported about 300 million tonnes of coal last year. An additional demand of such magnitude in a global trade of just 1.4 billion tonnes would trigger an enormous price response.
The surging electricity demand is driven by export recovery. China is on pace to increase exports by US$700 billion this year, more than Japan’s total exports. As central banks and governments hand out money to people during the pandemic, they are having a good time by ordering goods made in China.
Adding one Japan’s worth of exports in a year obviously requires a huge increase in energy consumption. As China depends on coal for roughly 70 per cent of its energy use, this global demand recovery is shifting energy use to coal – the dirtiest fossil fuel. It must be hard for the lawyers who run the major central banks to fully appreciate how their actions are affecting the world’s climate.
My two cents’ worth is that people want goods, but they don’t want to make them. Central banks and governments are giving them free money. All they need to do is press a few buttons on the mobile phone. The orders go to the lowest-cost producer – China. And consumers like the low prices and don’t really want to know where the stuff is made.
The world has been waging war on coal. The West, in particular, has been shifting away from coal in recent years. Last year, global coal demand fell by 5 per cent due to politics and Covid-19.
As the global economy emerges from the pandemic, coal demand has shifted more to the emerging economies that are coal-dependent. The climate warriors in the West have pushed coal out of their homes, only for it to re-emerge elsewhere. The war on coal is far from won.
The sky-high price would predictably lead to widespread capacity expansion in emerging economies. When this supply is ready, the global economic cycle may already be on a downward path. Just as the price is overshooting now, so it would undershoot in such a scenario. This is the age-old story of commodity boom-and-bust cycles.
Emerging economies need cheap and plentiful supplies of energy to grow. Coal fits the bill perfectly. The world needs to find alternative energy sources that are not just green, but also cheap. Meantime, the only solution is for rich countries to cut their consumption sharply.
Climate enthusiasts in the West can save the planet by putting on an extra jumper this winter, maybe even wearing a coat indoors. It’s time to dress up or shut up.
Andy Xie is a Shanghai-based independent economist specialising in China and Asia