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Thanks to Mother Nature and administrative decision-making, China's drive to reduce the use of coal has hit a roadblock.
You see, China entered 2017 aggressively trying to reduce coal capacity. The state-run Xinhua News even said last November that China was on track to cut its total number of mines to 7,000 by 2018.
But despite having a wealth of different energy sources – from (undeveloped) natural gas and oil to renewable sources like wind and solar – China remains dependent upon coal for most of its power generation and heat. To keep up with expanding demand from an expanding population, China on average is bringing a new coal-fired energy plant on line every week.
Compounding the situation, Beijing recently announced a reduction in overall production from some of the larger national coal mines.
China's move to wean itself off of its dependence on coal is important.
It's a testament to the country's commitment to fixing its deteriorating environmental conditions.
Sadly, it turns out that the drive is easier to announce than to pursue…
Why China Is Stuck Between a Rock and a Hard Place
Last week, domestic thermal coal prices hit record highs as a major cold snap gripped northern China. In classic "treat the symptom not the disease" fashion, Beijing responded by having major state providers cut their spot prices for coal.
Of course, that merely papers over the real problem. And that problem is about to get worse.
Coal miners will be cutting production for much of next month as the nation observes the protracted Chinese New Year. During the at least two-week period, most mining employees will be on holiday.
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Coal imports have been increasing to offset the shortfall – a development that, at the moment, is primarily benefiting providers in Australia and other Asian countries such as Indonesia.
However, stockpiles are declining… with available volume at ports and utilities remaining at multiyear lows. This results from an inefficient national coal infrastructure and delivery system. Based on local production and transport (itself already a problem in several areas), the entire system suffers accelerating shortcomings when it must rely upon imported coal.
Tight supplies will continue with both the calendar and the weather exacerbating the pricing. China may still rely upon centralized administrative edicts. Yet there is now a genuine market forming with its own dynamics and expectations.
Once again, this becomes decisive when we acknowledge the strong trend toward Asia dictating energy usage moving forward. If anything, this is intensifying, putting an additional premium on what sourcing must be used to meet that rising energy need.
As the chart above indicates, we may be focusing on China and India, which will soon overtake China as the No. 1 country in increasing energy use, but the real concern is much broader.
This is already a continent-wide problem.
In fact, Asian countries other than the dominant two will be posting higher demand increases over the next two decades.
That brings us back to the coal dilemma.
Only this time, what is hitting China today will be expanding to a wider region in short order.
Absent a contraction of population and a radical cut in energy use, the coal problem is going to be spreading.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.