China’s coal futures hit all-time high as floods worsen energy crisis

Chinese coal futures rose to record levels as floods shut dozens of mines and displaced more than 100,000 people, throttling the country’s main source of the fuel for electricity and compounding a global energy crisis.

Coal futures traded on the Zhengzhou Commodity Exchange climbed as much as 11.6 per cent to an all-time high of Rmb1,408.20 ($218.74) a tonne early on Monday.

The CSI Coal index of big miners listed in Shanghai and Shenzhen rose as much as 2.1 per cent, partly reversing losses from last week, when official orders to boost coal production sent prices tumbling.

Flooding in the central province of Shanxi over the weekend piled further pressure on Beijing to contain a growing energy crisis that threatens to undermine the recovery of the world’s second-largest economy. China’s problems come as price volatility in global energy markets has sent countries scrambling to procure power supplies at ever-higher costs.

The majority of China’s domestic coal comes from Shanxi, neighbouring Shaanxi province and the Inner Mongolia region. Other local factors, including an anti-corruption campaign in the coal industry and mine closures to reduce air pollution around national events, have led to power rationing for industrial and, in some cases, residential users.

“We expect the power cuts and resulting production disruptions to be temporary,” said Michael Taylor, chief credit officer for Asia-Pacific at Moody’s. “But if they continue for an extended period, such as into winter, the effects will spread across the domestic — and potentially global — economy.”

The floods in Shanxi displaced about 120,000 people, forced the closure of 60 coal mines and damaged more than 190,000 hectares of crops, according to figures released by the provincial government.

Other extreme weather events have also contributed to China’s energy crunch, with unexpectedly dry weather in the south this year hobbling hydropower production.

The power shortages, which have strained global supply chains, can also be ascribed to broader policy confusion as China tries to meet ambitious green energy goals.

High international and domestic coal prices and strict caps on what electricity producers can charge have made it financially unviable for many coal-fired power plants to operate.

But last week, the state council, China’s cabinet, said it would allow prices to rise as much as 20 per cent to incentivise power production, a jump from the previous 10 per cent limit. Beijing also ordered miners to dramatically step up production.

Analysts said the impact of the ructions in China’s energy markets could spread beyond global power prices. Taylor, at Moody’s, warned that prolonged power shortages in China could cut into factory output, which “could disrupt supply chains across Asia-Pacific given prevailing linkages, which will also increase prices along the chain”.