China’s coal shortage is about cash

How is it that China’s power plants are running short of coal, a year into a national mobilization plan to ensure security of supply?
Over the past five years, the country’s six major generators typically have had enough solid fuel in their yards to keep their turbines running for about three weeks. The figure has hardly ever dropped below about two weeks. Things are looking markedly tighter this year: since late April, stocks have been short of their five-year lows, sinking as low as 11.9 days earlier this month.
Coal prices have moved as you’d expect, with benchmark product at the port of Qinhuangdao east of Beijing up 20% from a year earlier, when prices were already up 70% year-on-year thanks to 2021’s energy crunch.
What’s striking about this situation is that there’s ample coal around — it’s just in the wrong places. Total inventories across the entire supply chain were a record 317.8 million metric tons at the end of June, according to China Coal Resource — a time when generator supplies were already heading below two weeks. Stockyards at ports were heaving at that point, reaching their highest seasonal levels since the commodities glut of 2015, according to Shanghai Steelhome e-Commerce, though they’ve since shrunk below seasonal norms.
The best explanation relates to cash. Qinhuangdao coal costs twice what it did three years ago. Although generators can pass on their fuel costs to customers thanks to reforms after last year’s power crunch, the black rocks in their stockpile are still tying up far larger sums of working capital. That’s an unattractive proposition at a time when balance sheets are constrained by China’s tougher credit environment, especially with utilities under pressure to invest every spare yuan in developing fixed-cost renewable generation instead.
Such just-in-time ordering can ensure that capital is used very efficiently — just ask Toyota Motor Corp. The problem is fragility, with the smallest disruption occasionally metastasizing into a crisis like we’ve seen in the world’s manufacturing supply chains in recent years. China’s coal generators, running on fumes, better hope they can make it through the year without any unexpected upsets.
Four-and-a-half years after the Shanghai International Energy Exchange launched its own oil futures as a challenger to the duopoly of Brent and West Texas Intermediate, the contract shows little sign of catching investors’ attention. Despite the better fit between Shanghai’s medium sour grade and diesel-heavy refinery outputs in Asia, the major Western benchmarks still account for close to 98% of combined open interest.
Some 20 million households across the US have fallen behind on their utility bills. It is, according to the National Energy Assistance Directors Association, the worst crisis the group has ever documented. Underpinning those numbers is a blistering surge in electricity prices, propelled by the soaring cost of natural gas.

—Bloomberg