China will weather month-long Indonesia coal export ban

China's booming domestic coal production may help the nation weather disruptions from an Indonesian export ban and a prolonged trade dispute with Australia.

China ordered domestic coal producers to boost production in 2021 amid a broader energy crisis, one exacerbated when it stopped buying coal from Australia, previously a major supplier. The production increase, along with expectations of unseasonably warm weather in January and industrial production cuts aimed at reducing pollution before the February Beijing Olympic Games, may help China avoid a coal squeeze during Indonesia's self-imposed ban on exporting its own coal. The archipelago said Jan. 1 that it would halt coal exports over concerns it would need to shut 20 coal power plants for lack of fuel.

"It comes at a pretty good time for China in that they aren't desperate for coal," Matthew Boyle, head of coal and Asia power analytics at S&P Global Platts, said in a Jan. 4 interview.

During the first 11 months of 2021, China imported 178 million tonnes of Indonesian coal, or 60.9% of its total coal imports, up from about 45% a year ago, data from China's General Administration of Customs showed. Imports from Australia, meanwhile, declined year over year to 2.7% in the first 11 months of 2021 from 29.5%. Indonesia's coal export ban is expected to impact 5.3% of China's total thermal coal supply, Zhang Jinming, a coal analyst with Guosheng Securities, said in a Jan. 2 note. Meanwhile, about 20% of thermal coal supply to China's southeast coastal region will likely be affected, Zhai Kun, coal analyst at Guotai Junan Securities, said in a Jan. 4 note. Power plants in the southeast region are major customers of Indonesian coal.

But the Chinese government encouraged coal production in October, leading to production increases. Chinese coal mines produced a record-high 370 Mt of coal last November, up by 4.6% from the previous year, according to the National Bureau of Statistics. Imports from Indonesia only accounted for 4.9% of the 3.67 billion tonnes of coal production from January to November of 2021.

Meanwhile, overall demand for power and coal is expected to fall until the Beijing Winter Olympics and Chinese New Year in February, thanks to a general slowdown in industrial production and output during the period, Boyle said. The January weather is expected to be warmer than average across northeast Asia, reducing coal demand, he added.

China also alleviated short-term coal problems by allowing plants to take shipments of 8.04 Mt of Australian coal already sitting in storage in the country in October and November of 2021, but officials did not indicate that this meant a thawing of trade tensions.

A momentary problem

The Indonesian government, now deep in talks with its coal mining sector, which is bristling over the export ban, said on Jan. 7 that it will be able to secure enough coal.

"For now the emergency is over," Coordinating Minister for Maritime and Investment Affairs Luhut Pandjaitan told CNBC Indonesia, and as reported by Reuters.

A longer-term export ban could have been trouble for Chinese power supplies, as the country could struggle to replace Indonesian supplies with any other supplier, especially if Australian coal remains unacceptable.

"If Indonesia's export ban lasts for a long time, the demand and supply of [the] domestic thermal coal market might return to a balance even [in] a tight situation," Zhang said.

Chinese importers would have to turn to South Africa amid lower production and imports from Russia and the U.S. in the middle of winter, according to Boyle.

The most-traded thermal coal futures in Zhengzhou Commodity Exchange surged as much as 7.8% to 724.8 Chinese yuan per tonne on Jan. 4, its first trading day in 2022. The futures were trading at 709 Chinese yuan/t on Jan. 7, still 4.6% higher than the Dec. 31, 2021, closing price before the exports ban.