China's top coal miners see tight balance of supply, demand

Three of China's major state-owned coal miners expect the balance of supply and demand to remain tight in 2022, as supply-side issues might need more time to resolve.

Soaring domestic coal prices amid supply shortages generated strong profits for China's coal producers in 2021. China Shenhua Energy Co. Ltd.'s net profit increased 44% to 51.6 billion Chinese yuan in 2021, Yankuang Energy Group Company Ltd.'s net profit surged by 168.1% to 16.94 billion yuan, and China Coal Energy Co. Ltd. enjoyed a 174.8% increase in net income to 9.36 billion yuan.

Supplies will remain tight through at least 2025 because China has restricted coal financing to curb excess capacity and rein in carbon emissions, Chai Qiaolin, CFO for China Coal, told investors during a March 25 earnings call.

Demand to stay strong

China's coal demand remains strong in the near term, especially for homegrown thermal coal — mainly used in electricity generation — according to Hu Jianhong, a manager at China Coal's sales division.

Driven by policies to stabilize economic growth, China has sped up the construction of major infrastructure projects. And businesses have resumed production after the annual "Two Sessions" political meetings in March, Hu said during the earnings call.

On the other hand, supply from foreign countries will be limited, because international coal prices and energy prices spiked amid geopolitical tensions, Hu said. Hu expects coal imports to fall significantly in the second quarter.

China imported 35.4 million tonnes of coal in the first two months this year, falling 14% from a year ago, mainly due to Indonesia's one-month ban on coal exports.

The International Energy Agency forecasts China's coal demand will grow by 1.1% per year on average from 2021 to 2024. China's coal consumption rose 4.6% to 4.23 billion tonnes in 2021, the most since 2013, according to the National Bureau of Statistics.

"As [China's] economy is booming, energy consumption still continues to grow ... but the contribution of new energy in power generation remains insignificant," Li Wei, chairman of Yankuang Energy Group, said on a March 31 earnings call.

"Despite intensive nuclear and renewable energy capacity expansions, China will still have to rely on coal and, to a lesser extent, gas to keep pace with rising electricity demand," IEA said in the Coal 2021 report, which was released in December 2021.

Efforts to boost domestic supply

Since 2020, fewer new mines have been built as coal miners slashed capital expenditure, according to Li. Meanwhile, some mines have stopped production due to strict environmental protection and safety control, and the government has closed coal mines with inadequate safety, low reserves and poor efficiency, Li said.

China operated 4,500 coal mines as of the end of 2021, down from about 4,700 in 2020, according to the China National Coal Association. The country had closed 5,500 coal mines from 2016 to 2020.

At the same time, China has been the world's biggest coal importer, bringing in 323.22 million tonnes of coal in 2021, the most since 2013.

The central government is trying to reverse the decline. China's coal production rose 10.3% in the first two months of this year, data from the National Bureau of Statistics showed.

China is planning to boost domestic production capacity by 300 million tonnes in 2022 and increase daily coal output to 12.6 million tonnes from current 12 million tonnes, the National Development and Reform Commission told local governments and state-owned companies in a March 11 meeting, according to a document by municipal government of Ordos in Inner Mongolia released on March 25.

The government has been accelerating new production capacity approval, mine license renewals and new mine construction since the fourth quarter of 2021, Li said. Still, it will take time to ease the supply constraint, Li added.

China's National Development and Reform Commission has set a price cap of 770 yuan per tonnes for medium and long-term contract of benchmark Qinhuangdao 5,500 kcal/kg NAR. However, production levels are still unable to meet the requirements, as the COVID-19 resurgence in China has affected production capacity and disrupted logistics, S&P Global Platts reported, citing market sources.

Meanwhile, major state-owned coal companies set conservative guidance for 2022 coal output. China Shenhua aims to produce 297.8 million tonnes of commercial coal, 3% lower than in 2021. The country's biggest coal producer set its 2022 coal sales target at 402.9 million tonnes, down 16.5% from a year ago.

Shenhua is applying to increase capacity in some mines, but it's still uncertain how long it will take to increase output, Huang Qing, secretary of the board of Shenhua, told investors on April 1.

As of April 6, US$1 was equivalent to 6.37 Chinese yuan.

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