Drought in China May Worsen Global Shortage of Coal

Normally, late July and early August are the wettest months in southern China. This year, however, rainfall during this period was below normal with precipitation in the region since July remaining at 135 mm. This is significantly lower than the average annual precipitation of the region from 2014 to 2021, which stood at 464 mm.

This drought has prompted an increase in the price of coal, as traders expect that more coal will be burned to meet the demand for electricity this winter as hydroelectric power generation dwindles.

The country’s increasing consumption of coal may worsen the already present global shortage as producers of power in the United States and Europe also revert back to the use of the fossil fuel as gas prices increase.

The shift observed in China marks a turn from earlier in the year when abundant hydro generation and heavy rainfall enabled the country to reconstruct depleted inventories and decrease its use of coal. During the first seven months of this year, China generated almost 730 billion kilowatt-hours of hydroelectricity, an amount significantly higher than its prior-2019 record of 650 billion kilowatt-hours.

This increase in hydroelectric power generation can mainly be attributed to the rainfall southern China received, which is said to be its highest since 2016. Total precipitation in the region amounted to about 687 mm.

During this period, China also recorded considerable increases in power generated from solar and wind, 28 and 61 billion kilowatt-hours respectively. This is in addition to recording a slight increase in output from nuclear, which amounted to 3 billion kilowatt-hours.

Data from the country’s National Bureau of Statistics shows that with more than enough electricity from other energy sources, power generation from coal-fired plants reduced by more than 60 billion kilowatt-hours. Currently, hydroelectric power generation may likely remain low through the rest of the year and well into next year.

To make up for this shortfall, China will need to up its consumption of coal, which will in turn put more pressure on stocks. For instance, Zhengzhou Commodity Exchange’s most actively traded domestic futures contract recently reached $148 per ton. This is its highest price in almost a year, increasing from $125 in June.

This increase is also making long rail journeys from the coal fields located in the north to power generators in the south even more frequent. It is expected that the tightening coal supply in China will affect global prices greatly as the nation accounts for more than one-half of total consumption globally. Coal producers such as Warrior Met Coal Inc. (NYSE: HCC) are likely to record even greater profit margins if prices rise any higher than their current levels.

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