China faces humiliation by seeking coal from Australia to meet energy demand

In 2020, China stopped imports from Australia to punish it for seeking an independent inquiry into the origin of the coronavirus pandemic. The list of banned products included barley, beef, cotton, coal, which China felt would hurt Australia’s economy forcing it to fall in line. Economic coercion has however boomeranged on China. Australian coal accounted for over one-third of China’s requirements. The abrupt ban on Australian imports led to a huge shortage of coal in China, leading to an unprecedented energy crisis that has crippled the world’s biggest manufacturing hub.

Beijing is scouting for coal from wherever possible to meet the energy demand. With the failure to procure the required coal, Beijing in a humiliating loss of face has had to turn to Australian coal. China however has no option amid shortage and surging prices of coal in the backdrop of 20 of 31 provinces suffering from the energy crisis, which has hampered industrial output significantly.

Coal accounts for over 60 percent of China energy consumption, and fossil fuel has seen a gradual and sustained increase in demand.1 China was the second-largest importer of Australian coal procuring 21 percent of the total coal produced in Australia. Japan is the largest buyer of Australian coal at 27 percent while India was third at 16 percent.

Soon after the Chinese ban, Australia moved its focus on other countries, especially energy-hungry India. Taiwan, South Korea too increased coal imports from Australia.  Thus, the Chinese restrictions did not affect Australia as Beijing had expected. One year after the Chinese import restrictions, Australia however exports increased, with thermal coal registering a growth of USD 203 million. China has tried to get around its ban on Australian imports by importing more coal from Indonesia, Russia, South Africa and even the US. Yet, China has failed to procure enough coal to meet its energy demand. At present, China’s major coal supplier Indonesia is struggling with production as heavy rains have forced mines to shut.

On other hand, it has been quite embarrassing for Beijing to make distress purchases of Australian coal within a year of the ban that was intended to be an economic punishment. “Chinese have done themselves a lot of reputational damage in the way they have quite transparently tried to coerce Australia with economic sanctions,” said Shiro Armstrong, an associate professor at the Australian National University.In order to rein in the humiliation, China’s state-run media has termed imports of Australian coal “not an ideal option”. Global Times newspaper asserted that the development does not mean resumption of the Sino- Australian trade. However, there are reports that China will keep buying coal from Australia as it will have to restore power generation before harsh winter grips the country. Chinese importers have said that the Beijing government is likely to allow imports of Australian coal.  “Customs is now allowing those (Australian coal) to be cleared through port. The pressure domestically on coal supplies is enormous,” said a senior coal industry executive. China has cleared 450,000 MT of coal from Australia in the beginning of October.

The price of thermal coal has jumped to USD 190 per tonnes from USD 90 about a year ago. This has destabilized the pricing mechanism for electricity generation and selling in the domestic market. “Their (China’s) problem is that they need to buy coal at market prices but can only sell electricity at prices capped by the government. Therefore, power plants have little incentive to significantly boost electricity generation, unless the government agrees to increase electricity prices for users, or something is done to lower coal prices,” said Ralph Leszczynski, research head at Banchero Costa, a leading brokerage house in the maritime sector. The ongoing energy crisis has impacted China’s economy negatively, and higher electric tariffs will worsen the situation further- – shrinking economic growth and aggravating the ongoing slowdown. “Energy intensive industries will be most affected by electricity rationing. The combined share of the industrial sector in affected provinces with power rationing is about 14% of Chinese GDP,” Kevin Xie, senior Asia economist at the Commonwealth Bank of Australia. In its latest global outlook, Goldman Sachs has already cut its 2021 China growth forecast from 8.2 percent to 7.8 percent “significant downside pressures” from energy shortages.