Explainer | China coal: why is it so important to the economy?

Why does China need coal? China is the world’s largest producer and consumer of coal. Thermal coal is widely used for power generation, which accounted for 56.8 per cent of the country’s total energy consumption in 2020, down from 57.7 per cent in 2019. But that was still far higher than cleaner energy sources – including natural gas, hydro, nuclear, solar and wind. Coal consumption in the world’s biggest coal user and greenhouse gas emitter grew 0.6 per cent in 2020, the fourth consecutive increase. According to China's National Bureau of Statistics, the share of “clean” energy – including natural gas, hydropower, nuclear and wind power – rose one percentage point to 24.3 per cent of consumption in 2020. Coal is also used by poorer households in many parts of the country for both heating and cooking. Coking coal is also a key ingredient in steel production. China produced 3.84 billion tonnes of coal in 2020, its highest output since 2015 and growth of 90 million tonnes from the year before. However, last year’s coal output was below the peak of 3.97 billion tonnes reached in 2013. The country imported 304 million tonnes of coal in 2020, up 4 million tonnes from a year earlier. China can produce most of the coal it needs. However, it imports coal to supplement domestic supply and to access higher quality coking coal for steelmaking. In 2019, China produced about 3.7 billion tonnes of coal and imported 300 million tonnes, according to pricing and research group Fastmarkets. Where does China get its coal imports from? In 2019, around 57 per cent of China’s thermal coal imports and 40 per cent of its coking coal came from Australia. In 2020, imports of Australian thermal coal were likely about the same scale, but coking coal imports probably rose to 50 per cent, according to analysts. In December, South Africa shipped thermal coal to China for the first time since 2014, with word in the industry that more was on the way as Beijing sought to diversify its sources of coal. A month earlier, Chinese buyers also snapped up coal from Colombia, which had never been a big seller to China because of long shipping times when compared to regional suppliers such as Australia and Indonesia. Historically, South African coal has not been allowed into China because it contains restricted trace elements like fluorine, while Colombian coal is usually viewed as a back-up option when regional prices blow out. That China has embraced thermal coal from both countries in recent months underscores just how unwilling it is to trade with one of its biggest coal suppliers: Australia. In addition to South Africa and Colombia, China can increase thermal coal imports from Indonesia, the world’s biggest exporter of the fuel. In November, it extended the relationship by striking a deal with Southeast Asia’s largest economy to buy US$1.46 billion more thermal coal over the next three years. China also has the ability to boost domestic production from its hubs in the provinces of Shanxi and Shaanxi, as well as the autonomous region of Inner Mongolia, according to analysts. China suffers worst power blackouts in a decade, on post-coronavirus export boom, coal supply shortage Most raw coal mined in China is used for power generation, while about 20 per cent is used to create coking coal for steel mills. Indonesia, Australia and Russia are the three biggest suppliers of thermal coal that is transported to China via ship, while Australia and Mongolia dominate exports of coking coal, which is used in steel furnaces. What does China’s unofficial ban on Australian coal mean? Amid worsening bilateral ties, China unofficially banned Australian coal in October and again in November, leaving dozens of vessels waiting off its coast to unload. In November, at least four major Chinese steel mills started diverting orders of Australian coking coal to other countries as a ban on shipments took effect, analysts said. Chinese steel mills and state-owned utilities revealed that Beijing had verbally ordered them to stop buying Australian coking coal and thermal coal. The Australian government refused to speculate whether the ban is a fresh salvo in a broader diplomatic tussle between the two countries, but some analysts said it was likely politically motivated. Officials in Canberra suggested the move could simply be Beijing looking to manage domestic demand, with imports reaching annual quotas meant to protect the domestic industry. Can China reach its goal of being carbon neutral by 2060? China, the world’s largest energy consumer and emitter of greenhouse gases, has pledged to transition away from fossil fuels over the next four decades, but achieving this goal will be difficult given energy security and economic growth remain key concerns for Beijing. In September, President Xi Jinping surprised the world with an announcement that China aimed to be carbon neutral by 2060 and reach peak carbon emissions before 2030. The commitment, which was light on detail, will require huge investment in renewable energy, electric cars and technology like carbon capture and storage. China’s 2060 carbon neutral pledge ‘incompatible’ with expansion of oil and gas pipelines, study says China will need to spend up to 130 trillion yuan (US$19.8 trillion) to hit the net zero goal, Ding Zhimin, the former deputy director of the Policy & Law Department of the National Energy Administration, told the International Energy Executive Forum 2021 in November 2020. It will also need to slash the share of coal in the energy mix to less than 5 per cent from 57.7 per cent in 2019 and raise new energy sources to more than 85 per cent, she said. Currently, around 15 per cent of energy is drawn from non-fossil fuels, including nuclear power. What is the outlook for China’s coal demand and supply? With no sign the ban on Australian coal will be dropped any time soon, questions have been raised about whether China can do without Australian coal, and whether the diplomatic spat between the two nations will drive a diversification of supplies. Though many industry observers say that in the long term China can shift away from Australian thermal coal, which is used for power generation, the country will have a harder time reducing imports of coking coal that is used for steel making. But the issue of diversification will also become less important over time as China decarbonises its economy to meet clean energy commitments and climate targets. However, analysts warned against too optimistic expectations of a rapid reduction in China’s greenhouse gas emissions. Analysts are confident China can increase domestic production of thermal coal, but local energy blackouts at the end of 2020 due to lack of coal supplies, which coincided with colder-than-usual winter weather, suggest domestic supply might not yet be sufficient to meet emergency supply needs. “China does not need Australian thermal coal, although one thing that has surprised us is the apparent shortage of higher energy coal in the Chinese domestic market,” Wood Mackenzie coal analyst Rory Simington said. With the curb on Australian coal imports, Chinese utilities have suffered the consequences of more expensive coal and have had to scramble for alternative supplies, he added. This was evident in soaring prices for the type of high-caloric coal – which has higher energy output when burned – that is exported from Australia. In short, it would be difficult for China to completely omit Australia from its mix of suppliers when power demand flares during summer and winter, said Claire Pickard-Cambridge, manager of Asia solid fuels at Argus Media. The rationing of power in many of the colder parts of north China this winter has showed that domestic production is currently falling well short of requirements this winter Claire Pickard-Cambridge “The rationing of power in many of the colder parts of north China this winter has showed that domestic production is currently falling well short of requirements this winter,” Pickard-Cambridge said. “The power suppliers hardest hit are the coastal utilities in populous eastern China, which are far from China’s coal mines in the north and typically rely on imported coal.” For coastal utilities, imported coal – including from Australia – is more accessible via ports than local coal from faraway Shanxi, Shaanxi and Inner Mongolia. China has an even tougher challenge when it comes to diversifying is supplies of coking coal away from Australia, as few exporters have the ability to provide both high volume and high quality. Higher quality steel production requires higher quality coking coal. “Only Mongolia has the scale to replace Australian coking coal by volume, but its lower quality does not make it a 100 per cent replacement,” said Chris Newman, ferrous markets manager at Argus Media Asia. Coking coal from Mongolia also has to travel long distances to where most steel mills are located, he added. In its latest draft development strategy, the China National Coal Association proposed limiting the country’s total annual coal consumption to no more than 4.2 billion tonnes a year by 2025 and reducing the number of domestic coal mines. But it said coal would remain a core energy source for China in the years to come. The use of imported thermal coal would start to decline first, given the headway China had made in nuclear and gas power generation on its coast, said James Stevenson, global research lead for coal, metals and mining at IHS Markit. China will import less thermal coal in 2030, and maybe it can accelerate that decline, but it’s unlikely that it could make 2022 look like what we expect 2030 to be James Stevenson “There is an overall move of the centre of gravity of coal-fired generation inland, where imports just don’t work economically,” he said. “So China’s need for thermal imports is going to decline anyway.” But coking coal was a different ballgame, he said. Even though the use of coking coal in steel production is set to fall because of the use of more scrap-based electric arc furnaces, Stevenson expects Chinese demand for coking coal, and thermal coal, to remain unabated for the next five to 10 years. “China will import less thermal coal in 2030, and maybe it can accelerate that decline, but it’s unlikely that it could make 2022 look like what we expect 2030 to be.” Want to know more? Each week, South China Morning Post journalist Finbarr Bermingham wraps up the latest economic data from China, delves deep into the ongoing US-China trade and tech war, and examines China’s changing economic relationship with Europe, Africa and the Indo-Pacific in the China Geopolitics podcast. And in every episode of the Inside China podcast, we take a deep dive into a specific topic, mixing independent reporting and exclusive interviews to bring you unique insights into an emerging potential superpower. Now, we are featuring regular updates on the coronavirus pandemic from across the country.

Explainer | China coal: why is it so important to the economy?

China is the world’s largest producer and consumer of coal, used for heating, cooking, electricity generation and steel making China is also the world’s largest emitter of greenhouse gases, but it has pledged to transition away from fossil fuels over the next four decades

Why does China need coal?

China is the world’s largest producer and consumer of coal, used for heating, cooking, electricity generation and steel making

China is also the world’s largest emitter of greenhouse gases, but it has pledged to transition away from fossil fuels over the next four decades