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La Nina Sparks Early Freeze In China As Coal Supplies Languish

Tyler Durden's Photo
by Tyler Durden
Monday, Oct 18, 2021 - 08:10 PM

China Meteorological Administration (CMA) warns of a La Nina weather pattern which has already brought in the first round of cooler weather. Temperatures across China are plunging, and the power crisis is worsening as demand for electricity generation ticks higher, straining coal supplies. 

Thermal coal futures on the Zhengzhou Commodity Exchange jumped as much as 8% to $284, a record high, on Monday, following reports provinces will begin the traditional heating season earlier than anticipated. 

CMA said temperatures slid more than 10 degrees Celsius in recent days across eastern China. There are reports snow has begun to fall in parts of Inner Mongolia and Heilongjiang. Across the country, mean temperatures have tumbled in the last several weeks. 

Last month, Bloomberg reported that China's central government officials "ordered the country's top state-owned energy companies to secure supplies for this winter at all costs."

Translation: Beijing is no longer willing to risk social anger, and in the future, China will be subsidizing coil and natural gas, which will lead to even higher prices, which will lead to even higher prices for other "substitute" commodities such as oil, which is why Brent and WTI have are at 7-year highs. 

But even with panic buying, sluggish September fuel supplies raised concerns that domestic production will be unable to meet rising demand for electricity generation this winter. 

Reuters said coal production in China was around 334.1 million tons last month, down from 335.24 million tons in August. The ability to boost coal production has hit roadblocks as flooding closed dozens of top-producing mines in the country.  

"The Chinese government is losing the battle to control rising coal prices," said Alex Whitworth, head of Asia Pacific Power and Renewables Research at Wood Mackenzie. "Despite efforts to increase coal supply, weather, security, and logistics challenges caused production to fall in September. Nor has China been able to rein in rising electricity demand." 

The National Energy Administration said electricity consumption in September climbed 6.8% compared with last year and increased 12.9% for the first three quarters of this year. 

Last week, China introduced market reforms to allow electricity prices to rise 20% to incentivize power plants to generate power. Some plants were shuttered or reduced capacity because higher input prices such as coal and natural gas have made electricity production uneconomical. 

"The recent price liberalization for coal power utilities and industrial end-users is a sign that the government does not believe it can control coal prices in the near future," Whitworth said.

The latest round of news suggests it's all hands on deck for Beijing as the traditional heating season begins earlier this year as the country races to secure coal to rebuild depleted stockpiles. 

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