China has made bold statements about how it is cutting Australia off, but there are factors at play that could set it back.
China could be in the throes of an energy crisis. Still, he’s determined not to back down on his Australian coal blacklist. But for how long ?
“It seems far-fetched to hope that China’s energy shortage will lead to growth in Sino-Australian trade,” the Communist Party said. World time stated earlier this week.
But “unprecedented” coal prices – and a global supply shortage – seem to have swept aside any impact the coercive trade embargo might have had.
“Unprecedented, as international thermal coal prices have already increased by more than 100% since May of this year,” said Dr Lurion De Mello, energy economics expert at Macquarie University. “It’s not normal.”
The global economy has started to emerge from its pandemic-imposed shutdown. This, combined with a series of extreme weather events, geopolitical issues, a disruption in coal production and storage by Russia and China, has triggered a dramatic fuel shortage.
Gas. Coal. Oil. All are experiencing increased demand.
And things get risky.
China has suffered major power cuts. Its industrial heart has been ordered to reduce its operations. Businesses need to take efficiency measures. Residents are subject to surprise outages.
Europe is in a similar situation. Gas prices have gone up. Electricity now costs more than 200% more than in January. Soon the nations of the region may have to choose between keeping industries producing – or keeping people warm.
The crisis can be a boon for coal and gas exporting countries like Australia.
But how long will it last?
In the balance
“Some believe that China can rely on coal imports to some extent to alleviate power shortages which have spread to several provinces,” he added. World time reports.
It has already tapped into the million tonnes of Australian coal that has been in ships since Chinese customs refused to accept deliveries. Even if it’s already paid.
“There has even been speculation that China’s coal shortage could open a window of opportunity to appease a coal-focused trade dispute between China and Australia,” the report adds.
But he concludes that such an embarrassing about-face is not necessary.
“Indonesia, Russia and Mongolia were the three main sources of coal imports into China. In the first eight months of this year, China’s imports of coal from the United States, South Africa, Canada and the Philippines have grown significantly. In that sense, the coal trade frictions between China and Australia have not had much of an impact on China’s coal imports.
He does not mention that these imports have so far failed to alleviate their own production problems induced by climate change. Nor the additional cost that this implies.
“We are entering a meteorological configuration where the northern hemisphere will experience a longer and colder winter than usual,” explains De Mello. “If the winter is really extreme, I think the coal supply will be a critical factor. So they could still decide to relax import restrictions on Australian coal because there has been so much disruption. “
Australia is the world’s second largest exporter of thermal coal. China, Japan and South Korea are its three main customers.
Prices – at around A $ 330 per tonne – are at record highs.
How long it will remain so, however, is uncertain.
All three countries have adopted net zero carbon emissions targets as climate change begins to make its mark on the planet. Japan and South Korea stressed their willingness to move quickly in this direction.
So, has coal reached its peak? Not yet, says De Mello.
China operates 303 coal-fired power plants, according to De Mello. “It’s still the fuel of choice for power generation there. And China, like many countries, is trying to store thermal coal. “
Despite the trend towards low-carbon energy, demand for coal has actually started to rise again in places like Germany and India.
“They fear that they cannot afford the high gas prices,” says De Mello. “The supply of renewable energy is also irregular due to bad weather and the Germans are not getting enough gas from Russia. They were therefore forced to return to coal – and they have already started to run out ”.
This year, global coal supplies got off to a bad start after heavy rains and flooding in Newcastle slowed Australian exports in March.
Charcoal absorbs moisture. Leaving it in the rain makes it much heavier to transport and less efficient at burning. So it makes economic sense to leave it in the ground.
Since then, long periods of bad weather have also affected Indonesian production. Today, China is experiencing severe flooding in many of its national coal-producing regions.
Buildings collapsed and landslides swept away roads and infrastructure in more than 70 districts in northern China. The floods affected 1.8 million people in Shanxi Province, where 30% of China’s total thermal coal supply is mined.
This has put additional pressure on China’s already shrinking power-generating coal inventories.
Add to the mix a reborn economy after the pandemic-imposed shutdown and a rapidly expanding, energy-hungry middle class – and you have minimal margin for error.
China is not the only place to be in trouble.
India is also suffering. Last week, government agencies reported that 63 of the country’s 135 coal-fired power plants had only two days of supply on hand. As in China, India’s shortages were caused by transportation problems brought on by extreme weather conditions.
But it won’t last forever, says De Mello.
“After this whole winter cycle is over, I think the prices are probably going to go down because it’s kinda crazy right now. There will have to be some sort of correction.
Winds of change
“China is always on the lookout for alternative fossil fuels and mineral resources,” observes De Mello. “And as soon as they get their hands on it, it will be a problem for Australia.”
China’s coercive economy is not just about coal. It’s about everything else too.
“Australia has the best quality iron ore in the world. But they have reduced imports, ”explains De Mello. “Now a lot of Brazilian iron ore is entering China, even shipments from Canada and Peru are expected to arrive next month. These alternatives, coupled with the easing of steel production, have all but pushed the price of iron ore down by about 30 to 40 percent so far this year. “
A similar situation is emerging for gas.
“China has overtaken Japan as Australia’s largest liquefied natural gas (LNG) importer. The Russians have launched this 4,000 km long Power of Siberia gas pipeline project and a gigantic LNG project on the Yamal Peninsula to supply gas to eastern China. All of these projects, once fully operational, are likely to strain Australian exports. Australia’s coal industry has survived by diverting its exports to India, South Korea and Japan.
And, once those countries start implementing their zero carbon targets, De Mello believes other countries will take a bit of slack.
“If you look at places like Pakistan and Bangladesh, they’re pretty much desperate,” he says. “Pakistan burns firewood for warmth and for cooking because gas is very difficult to find. They are now planning to import high sulfur fuel oil (HSFO), the nasty substance the shipping industry is trying to get away from.
“That’s the problem. I mean, we can’t just move away from fossil fuels. It’s not enough. We have to do it gradually and in a thoughtful way.”
And China will soon find itself in a similar situation when it comes to Australian coking coal.
“There is currently no alternative to coal for efficient steel production,” says De Mello. “People are experimenting with hydrogen, like Sweden. But the capacity for mass production is just not there ”.
Jamie Seidel is a freelance writer | @JamieSeidel