Domestic output is soaring after Beijing pressured state-owned producers to boost activity to ensure energy security after shortages last year and to insulate it from the surge in global commodity prices. Coal imports are down 24% and liquefied natural gas by 11% over the first three months of the year.
In the wake of the Russian invasion of Ukraine, a fossil-fuel production boom by the world’s largest energy importer is just what global fuel markets need. With most exporters producing at full capacity, China could be a “game changer” if it cuts back on overseas purchases, Citigroup analysts including Ed Morse said in a research note last week.
“China’s desire to walk away from seaborne coal imports by boosting domestic coal output should pose major downside risks to global fossil-fuel prices over the next few years,” Morse wrote. “China could be the only importer with large enough domestic production to make more energy supplies available globally.”
While China is well-known as the world’s biggest energy consumer, its producers are no slouches either. It mines half the world’s coal and is No. 4 and No. 6 in the rankings of global drillers of gas and oil.
Growing coal output has been an obsession of Beijing’s since a shortage of the fuel caused widespread power outages in the fall. Earlier this year, government officials set a target of increasing production capacity by 300 million tons, the same amount China typically imports annually. Output surged 15% year-on-year in March at the same time that less coal was needed for electricity generation, with thermal power output actually falling as pandemic lockdowns slowed economic activity.
“No matter how you cut it, imports are going to decrease over time,” said Xizhou Zhou, managing director for global power and renewables at S&P Global Commodity Insights. “In the short term, all these pandemic curbs are going to slow down energy demand growth, so China is likely going to play a moderating role in coal prices.”
To be sure, domestic demand for coal could come roaring back in the second half of the year if lockdowns end and China leans heavily on construction-led stimulus to spur economic growth. And it’s unclear whether the production surges are sustainable, with a top industry official saying last week that the push has reached its limits and still may not prevent a return to electricity shortages in key industrial regions.
Still, extra mine output can help not only the global coal market, where futures have more than doubled this year, but also the gas market through power plant fuel substitution. China is also increasing domestic gas production and pipeline imports, leaving more LNG supply available to be rerouted to Europe as it cuts dependence on Russian deliveries.
“We believe the reduced China LNG demand in the first quarter has contributed to the alleviation of Europe’s LNG tightness,” said Wood Mackenzie senior consultant Jingjing Du. “Moving forward, any slowdown in Chinese or Asian LNG demand will help Europe.”