China's Rising Coal Consumption: Consequences For Global Markets

If there is a single country that greatly influences the global coal industry, it’s China. Chinese coal consumption has increased almost threefold since 2002: larger than the rest of the world combined. To compare, coal makes up around 10% of the total energy usage in the USA, while similar metrics from China clock in at 70%.

Chinese consumption, production, and import of coal have shown growth, and, despite commitments to reducing coal use and market dips, the country may be on course to increase its overall coal needs.

In this article, we will analyze the current state of the Chinese coal industry, including growth factors, the development of the sector, and its influence on the global market.

Factors Driving Chinese Coal Consumption

Retail electricity consumption remains the dominant factor for China’s coal demand. As the country attempts to raise clean energy sources, coal-fired power remains the backbone of the economy, producing as much as 61% of total electricity generation. The role of coal has lessened, yet absolute net electricity generation increased from around 1000 to more than 4500 terawatt-hours.

Chinese heavy industry also provides demand for coal: to power electricity and chemical or operational processes. The key sectors in this field are cement and steel production, which are reliable sources of estimates for prospective coal consumption, as both new residential permits and infrastructure projects provide a robust demand for cement and steel. As the country recovers from COVID-19 and the economy rebounds, coal use steadily rises across multiple sectors.

COVID-19 And Economic Resurgence

In 2022, the Chinese economy suffered a sudden and prolonged decline in activity caused by the COVID-19 outbreak. China’s zero-COVID stance led to factory closures, country-wide lockdowns, consumer spending slack, and reduced electricity and coal demand.

Construction was affected most severely. Besides slumping demand, the industry suffered from regulatory action as the Chinese government cracked down on high leverage levels of the country’s major developers. These pressures prompted an abrupt fall in new residential building permits, translating into a 15% decline in cement output and an overflow of steel production. 

2022 can be used as the floor for evaluating the growth of Chinese demand for coal, but according to the National Bureau of Statistics, annual coal consumption increased by 4.3%. Add in recent and necessary infrastructure plans, and every indicator points to coal demand rising at more than 4.3% annually for the next five years.

New Power Plants For An Overwhelmed Grid

According to Global Coal Plant Tracker, the construction of 50 GW of coal power capacity started the same year, representing a greater than 50% increase from 2021. The Chinese government also gave construction permits to projects representing 106 GW or two major coal plants per week.

The 2021 blackouts in northeast China were caused by a lack of coal and extreme heat waves that pushed the Chinese electrical grid to its limits. While some provinces produce a surplus, they cannot distribute power efficiently because of outdated infrastructure, leading to some provincial governments building their own plants.

Environmentalists point out that China’s goal to reach carbon neutrality by 2060 and Xi Jinping’s promise to reduce the country’s coal consumption in 2026-2030 indicate that these new plants will operate below the base load rate. Still, the need for coal will rise due to these new facilities, and the capacity for greater use is there in case of emergencies.

Impact On The Global Coal Market

The question of whether demand growth for coal translates into elevated prices globally depends on Chinese domestic coal production. Coal output is soaring at 9% year-over-year in 2022, and a 4.8% increase in production for the first four months of 2023.

This, however, doesn’t seem sufficient to satisfy the economy’s appetite. According to S&P Global, Chinese imports surged 63.1% in the first quarter of 2023, and this growth only continues to accelerate. March alone showed a whopping 151% year-over-year increase.

The loosening of COVID restrictions can partly explain this trend, though further analysis indicates that the movement might be more sustainable. In 2020, amid the Uyghur scandal and accusations of the lab-made nature of COVID, the Chinese government imposed a shadow ban on imports of Australian coal, which accounted for around 40% of China’s imports.

With the first new shipments from Australia coming in February and no import tariffs on coal until at least the end of 2023, it seems China doesn’t expect its domestic production to catch up with demand. This will create significant upward pressure on prices in the global market.

Coal’s Future In China

The end of 2023 and China’s decision to re-up import taxes will be important milestones to note, as well as any infrastructure investments in electricity grid modernization. The improvements would make power redistribution more feasible and potentially reduce the need for more coal-powered plants.

While these indicators are still unknown, the increase in demand for coal is already well-proven. With investments in coal acquisition, use, and industry at recent highs, it's unlikely the Chinese government will want to squander those commitments. For now, the future of coal in China looks reliable.