Spike in Chinese coal imports lifts global trade despite weaker demand elsewhere

China's surging import demand is providing support for the international coal market, despite the country's economic slowdown and sufficient domestic supplies.

Global seaborne coal trade volume has grown 6.8% year over year to 763.4 million metric tons, mostly driven by demand from China, data from S&P Global Commodities at Sea showed. Seaborne coal arrivals to China jumped by 82.6% year over year to 216.7 MMt as of July 28. The surge in imports reflects Beijing prioritizing energy security by cutting coal import tariffs to zero until the end of 2023 and lifting its unofficial ban on Australian coal.

Coal arrivals to the rest of the world fell by 8.3% to 546.7 MMt, according to Commodities at Sea data, as economic pressures weighed on demand. European countries have moved away from coal thanks to tumbling gas prices and rising carbon costs, and Indian imports have declined on higher domestic output. This has contributed to an oversupply in the international coal market, causing coal prices to slump from record highs in March 2022, when Russia's invasion of Ukraine sparked concern about an energy crisis.

"Only China has the ability to absorb this much [excess] supply," Pranay Shukla, director of research and analysis of dry bulk commodities and shipping at Commodity Insights, said in an interview.

Chinese power plants increased reliance on coal in the first half of 2023 because of hot weather and lower hydropower generation related to the El Niño weather pattern. The country's total power generation grew by 3.8% year over year to 4,168 TWh, according to China's National Bureau of Statistics (NBS). Hydropower generation fell 22.9%, while thermal power generation increased by 7.5% over the same period. Coal's share of China's generation mix rose by 2 percentage points year over year to 71% in the first half of 2023.

Coal flows in from Indonesia, Russia, Mongolia

Global oversupply and slumping prices have spurred countries to redirect sales to China, making imports more economical for Chinese coastal power plants than domestic supplies.

China imported a record 221.9 MMt of coal in the first half of 2023, up 93% from the same period last year, according to the General Administration of Customs.

China's imports of Indonesian coal rose 68% year over year in the first half of 2023. Imports from Russia more than doubled as Russia exported discounted coal to its friendly neighbor amid governments' sanctions. Purchases from Mongolia surged 270% year over year after the two countries eased COVID-19 border restrictions. The country imported 16.6 MMt of coal from Australia after Beijing ended its unofficial embargo on Australian coal after more than two years.

International coal supply has increased as Indonesia and Australian coal production have had fewer weather-related disruptions, said Su Huipeng, a senior analyst at CCTD, a price provider and consultancy under the China Coal Transportation and Distribution Association.

But demand for coal is shrinking everywhere except in China. European countries have built up substantial natural gas and coal stockpiles thanks to mild winter and strong renewable energy generation. India's demand for imported coal has dropped after the country ramped up domestic production to avoid a repeat of coal shortage in 2022, when it was facing heat waves, Su said in a July 26 market briefing.

As European demand continued to fall and further drove down coal prices, high calorific-value coal from Colombia and South Africa started to flow into China in May and June, despite higher freight costs, said Zhang Huan, an analyst from coal consultancy Yimei.

Domestic miners struggle to compete

Record coal imports and abundant domestic supplies are hurting China's coal mining and washing industry profits, which fell 23.3% year over year in the first half of 2023, according to NBS. Beijing has ramped up coal production, with first-half domestic coal output rising by 4.4% year over year to 2.3 billion metric tons, according to the bureau.

Additionally, more coal consumers have defaulted on mid- and long-term contracts due to falling coal prices, the China Coal Transport and Distribution Association said July 1 following a June 28 industry meeting with more than 30 top miners and associations. The composite transaction price of 5,500 kcal/kg coal at Qinhuangdao Port, a benchmark for domestic prices of both long-term contracts and the spot market, fell nearly 10% so far this year to 734 Chinese yuan per ton, CCTD said.

Miners and industry players in the meeting suggested that downstream sectors should control the scale and pace of coal imports to avoid surging imports from hitting the domestic market. But analysts do not expect any import controls, as Beijing is prioritizing energy security to prevent a power crisis like those seen in 2021 and 2022.

"We don't see any indication [that] the Chinese government might restrict [coal imports]," Commodity Insights' Shukla said. "Import coal is very, very competitive versus domestic coal [in terms of price and quality], so the utilities are very happy with buying the imported coal."

"Coal-fired power plants have the last word," Yimei's Zhang said.

Imports to remain high in second half

Analysts expect China's imports will continue rising, albeit at a slower pace, in the second half.

Commodity Insights raised its forecast of China's annual total coal imports to a record high of 380 MMt-400 MMt, with 60 MMt-70 MMt coming overland from Mongolia and Russia. The imports would be the highest level since records began in 2003, according to S&P Global Market Intelligence Global Trade Analytics Suite data going back to 2003.

Chinese coastal coal plants will continue to buy on the seaborne market as long as imports remain cheaper than domestic supply, said CCTD's Su, who expects 2023 imports to reach 410 MMt-420 MMt.

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