As China’s economic expansion continues at home and abroad, its demand for coal remains largely unabated despite efforts to pursue less environmentally damaging policies.
Launched by President Xi Jinping in 2013, China’s ambitious ‘One Belt, One Road’ (OBOR) has morphed into an estimated US$900B-plus series of infrastructure projects and proposals along land routes for road and rail transport, the Silk Road Economic Belt, and sea lanes, the 21st Century Maritime Silk Road, from Asia to Europe.
Despite an initial vision to develop low-carbon policies, Beijing’s OBOR ambitions have required continued investment in coal power infrastructure across Eurasia and China’s growing spheres of influence. The construction of port terminals, railways, highways and infrastructure along these routes spells large-scale, sustained demand for thermal coal for electricity, and metallurgical coal for steel too.
International coal power projects have consequently become a major focus of investment efforts for China’s government and its staterun enterprises. The Institute for Energy Economics and Financial Analysis (IEEFA), a US thinktank, reports that Chinese finance and expertise are now behind a quarter of new coal plants in the pipeline globally.
The IEEFA says Chinese “policy banks”, such as the China Development Bank and the China ExportImport Bank, have financed nearly 60 complete and under-construction coal-fired power plants since 2001, totalling more than US$40B. From 2013 to 2016, the five biggest coal plant financiers from the G20 nations were located in China, offering US$15B in financing, according to the National Resources Defense Council, a US environmental lobby group.
Chinese institutions are now behind US$35.9B of funding for 102 GW of up-and-coming coal plant projects in 27 countries, according to IEEFA. This includes US$21.3B that has been committed to 30 GW of coal-fired capacity in 12 countries, and an additional US$14.6B that has been proposed in funding for more than 71 GW in 24 countries.
Beijing’s drive to invest in coalfired capacity comes despite its efforts to diversify its energy sources, including renewables, and its recent signals that it will restrict lending for coal-related projects. Elsewhere, global financiers, including development banks, increasingly view thermal coal as a poor investment. The World Bank, the UK’s Standard Chartered, Italy’s Generali and Japan’s Nippon Life are among those that have decided to no longer back coal.
China’s investors are largely state-owned, however, and where government strategy goes, they follow. The biggest lenders include the policy banks, followed by stateowned commercial banks, such as the Bank of China and the Industrial and Commercial Bank of China. State-owned corporations involved include utility firm State Grid Corporation of China, infrastructure group China Energy Engineering Corporation, and power giants State Power Investment Corporation and China Huadian Corporation.
The IEEFA reports that China’s leading financial institutions are at odds with a shift among their global peers to limit investment in coal plants in international markets. It warns that Chinese finance is stepping in as a lender of last resort for international coal projects, and the moves are creating the risk of “stranded assets” that will struggle to adapt as coal power becomes obsolete. Bangladesh has the most proposed coal-fired capacity backed by Chinese funds, with US$7B for 14 GW, says the IEEFA. Other countries with Chinese backing for coal projects include Vietnam, Pakistan and Indonesia. South Africa is also a major recipient.
These projects across the new routes include coal import terminals and domestic coal mining with dedicated rail facilities, creating longterm structures for the supply and use of coal. Chinese companies are acting as engineering, procurement, and construction contractors, and as co-managers. Some 30 GW out of the 102 GW of global coal-fired capacity supported by Chinese finance involve joint ownership with Chinese corporations.
No stopping coal
As China extends its international support of coal-fired plants and infrastructure, coal remains at the core of its domestic economy. The country is responsible for 54% of global coal demand, according to the Paris-based International Energy Agency (IEA). Although China’s growth in demand for coal has slowed since the start of the century, it remains substantial. The IEA estimates China’s annual demand for coal of 2.75 Bt in 2017.
Recent data suggests that its demand for coal-generated power continues to rise and capacity is growing. China accounts for 45% of the coal-based electricity generated in the world, compared to 37% in 2010, according to the IEA. Its coal power fleet has reached a capacity of around 940 GW, and is expected to grow to 1100 GW in 2020.
This increase in coal power generation capacity comes as China’s industrial output expanded by 6.2% in 2018, although this annual rate of growth has slowed slightly from the 6.6% in 2017, according to the National Bureau of Statistics (NBS). The mining sector also grew by 2.3% in 2018. This growth in both coal power generation and mining comes despite Beijing’s efforts to reduce overcapacity across the coal sector, as well as among iron and steel producers.
However, hundreds of coalfired power stations are being built across China, despite government efforts to rein in construction activity, according to US environmental lobby group CoalSwarm. In 2016, the China’s National Energy Administration (NEA) and the regulator, the National Development and Reform Commission (NDRC), moved to restrain growth, instructing provinces to limit coal-fired capacity and postpone coal power projects. However, in May last year, faced with rising demand, the NEA lifted construction bans in Shaanxi, Hubei, Jiangxi and Anhui, and relaxed the bans in other provinces, according to CoalSwarm.
Although official figures are yet to clarify the picture for the full year 2018, the NEA reported in July last year that coal consumption in China increased by 3.1% over H1 2018 compared with the same period a year earlier. The country’s energy consumption rose by 2.9% in 2017.
China’s coal production is rising and was up 5.2% to 3.55 Bt last year, according to the NBS. Miners produced 320 Mt of coal in December alone, the largest monthly volume since June 2015. Although China has closed older mines in its battle to clean up the environment, it has also approved US$6.64B worth of new coal mining projects in 2018, which has stoked production levels.
Meanwhile, these recent environmental protection policies, which have hit smaller coal mining operations in particular, together with rising mining costs, have pushed up coal prices in China. Combined with the increase in demand for thermal power generation, China has supported an increase in demand for seaborne coal imports.
According to global financial data analysts Refinitiv, which tracks trade flows, total coal import increased by 6.1% in 2017 and by more than 9% in 2018, although the ongoing import restrictions affecting certain regions in China resulted in the figure slowing from September 2018.
Last year, coal imports expanded to 281.5 Mt from 271 Mt a year earlier, according to official import statistics from China’s General Administration of Customs. However, the nation is resorting to import restrictions to balance the impact of its environmental policies and support for the domestic coal industry, and this is likely to have an impact on coal imports this year.
In November, the NDRC imposed new port restrictions on coal imports to restrain coal import volumes. Imports for December fell by 47% to 10.23 Mt from a year earlier, according to Platts. In 2017, China imposed import restrictions on coal, relaxing the orders at the end of the year following a harsh winter. Restrictions crept back from April last year.
Beijing regularly opts for restrictions on coal imports amid worries that large volumes could harm the domestic mining industry, as well as concerns over the pollution related to some lower quality supply. In early 2018, the NEA and Chinese power groups reassessed the use of imported coal for power generation, followed by the major import provinces of Fujian, Guangdong and Zhejiang imposing coal import restrictions.
Refinitiv analysts suggest that coal prices will be heavily influenced by Beijing’s attempts to balance environmental and protectionist policies. Imported coal will come under pressure as more efficient coal capacity comes online through the extension of existing transport networks and new facilities, says Refinitiv.
Meanwhile, Chinese utilities and traders have built up record coal stocks, pushing down domestic prices and creating a glut of supply. Traders expect imports of coal, used for household heating, as well as power generation and steelmaking, to remain low in 2019, as the government continues its curb on imports to boost domestic coal prices.
In January, dozens of ships carrying coal and iron ore, mostly from Australia, were waiting to unload outside ports due to customs delays. Refinitiv ship tracking data showed coal shipments departing from Australia’s Newcastle port to China fell 30% to 18 Mt in January compared to the previous month.
In February this year, Chinese coal traders put a hold on ordering Australian coal amid customs clearing times at least doubling to 40 days or more from a usual delay of five to 20 days. International traders told Reuters that Chinese ports were holding up all thermal shipments from Australia for up to 60 days.
Despite recent diplomatic tensions between Beijing and Canberra, Anglo-Australian mining giant BHP Group’s CEO, Andrew Mackenzie, insisted that the delays reflected China’s moves to balance imports and domestic production, rather than Sino-Australian international relations.
China has previously restricted coal imports in a bid to support domestic coal miners, reduce consumption and tackle air pollution. In 2017, China curbed the supply of Indonesian coal, which is considered high in impurities and low in energy efficiency. Traders in China and on international markets told Reuters that rising demand for Indonesian and Russian coal was making up for Australian supply.
Oz coal embargo
In late February, officials of the Dalian Port Group confirmed a ban on imports of Australian coal and a cap at 12 Mt on all coal imports to the end of 2019. Five harbours overseen by Dalian customs – Dalian, Bayuquan, Panjin, Dandong and Beiliang – will not allow Australian coal through, the Dalian port officials said. Coal imports from Russia and Indonesia will not be affected. The Dalian ports handled about 14Mt of coal last year, half of which was from Australia.
As China restricts coal imports, it remains unclear how soon the limits will be relaxed, according to FranzJosef Wodopia, managing director of Germany’s VDKI coal lobby group, which monitors global seaborne imports and exports. The size of China’s domestic coal production will determine coal imports. Moreover, the goal of China’s energy mix, including at least 10% gas by 2020, could also restrict its imports, says Wodopia.