China orders coal miners to boost output to counter energy crunch

China has ordered coal miners to boost production urgently as the energy crisis threatens factories across the world’s second-biggest economy and forces Xi Jinping’s administration to backtrack on climate change promises.

Energy officials in Inner Mongolia, one of China’s largest coal producing regions, instructed 72 local miners to expand capacity by 100m tonnes, according to a report by Securities Times, a state-controlled national financial newspaper.

The latest effort by Chinese authorities to combat acute power shortages comes after high-tech manufacturing factories were forced to halt or reduce operations, power cuts affected homes in parts of north-east China and there were warnings that critical industries such as food production could also be hit.

The impact of the decision to boost supply was felt immediately in Chinese markets as they reopened from a week-long national holiday. Thermal coal futures traded in Zhengzhou opened almost 3 per cent higher on Friday but quickly swung lower to be down about 11 per cent. The CSI Coal index of listed Chinese miners fell as much as 5.5 per cent.

Gavin Thompson, an Asia-Pacific commodities expert at Wood Mackenzie, a research consultancy, said that China, like other energy markets facing shortages, “must perform a balancing act” of needing coal to keep the lights on while also showing commitment to decarbonisation targets.

“This looks uncomfortable as China prepares for [international climate conference] COP26 and comes just weeks after President Xi announced that China will no longer build coal plants overseas. But the short-term reality is that China and many others have little choice but to increase coal consumption to meet power demand,” Thompson said in a research note.

The decision to expand coal production rapidly at scores of mines in Inner Mongolia was made as China was forced to backtrack on its own trade bans on Australian coal, underscoring the intensity of the power crunch.

The Financial Times reported this week that Australian coal cargoes had been quietly unloaded at several Chinese ports, undermining bans on Chinese state-owned groups importing coal from Australia amid broader political and security tensions simmering between Canberra and Beijing.

Chenjun Pan, a China agricultural sector expert at Rabobank, expected China’s food logistics networks, such as cold chain storage facilities, to also feel “some impact” given their intense electricity use.

However, she added that while coal shortages and energy price increases might appear to be a “short-term, cyclical” problem in China, the episode highlighted the long-term structural challenges in transitioning to cleaner energy systems.

“All sectors need to consider [this] seriously,” she said.

The power shortages have been blamed on a combination of weaker coal output and regulated electricity prices. The energy crunch has piled pressure on China’s economic planners already grappling with the crisis at Evergrande, China’s highly indebted property group.

Société Générale said it had revised down its third-quarter gross domestic product forecast for China to 5 per cent from 5.5 per cent.

“There is simply too much downward pressure on China’s economy at the moment . . . Judging from the latest high-frequency data, the power crunch has already caused notable damage to industrial activity,” the bank’s analysts said. “As a result, we expect industrial production growth to decelerate notably in September.”

Li Shou, a Beijing-based campaigner at Greenpeace, said the power crisis had exposed the problems with China’s overreliance on coal, which accounts for more than half of the country’s energy consumption.

“Coal, as the code word for ‘energy security’, is not secure at all,” he said. “We also hope that the current problems help us go beyond the debate of whether we need to dig more coal or not, but focus on the deeper problems that lead us where we are, namely the reform of our power system, the pivot away from an energy intensive economy, and the need to enhance energy efficiency.”

China’s domestic coal production was 3.9bn tonnes last year. Xi has won international praise for promising that China would hit peak carbon emissions before 2030 and reach carbon neutrality by 2060.

Additional reporting by Emma Zhou in Beijing

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