Look at the coal yards surrounding China’s power plants and you’ll notice something strange happening.
Typically at this time of year, stockpiles of the fuel that provides about two-thirds of the country’s power should be shrinking. Peak season for thermal power generation is July and August when cities switch on their air conditioning, along with the coldest months of winter. That causes generators to run down supplies of coal waiting to be burned.
That’s not happening this time around. Weekly stocks at the country’s six biggest power generators hit a record high of 18.4 million metric tons the week before last, according to data compiled by China Coal Resource. As a proportion of consumption, that equates to about 30 days of supplies, at a time of year when the ratio is normally dropping below 20.
That’s a very bad sign for generators’ appetites, especially as the China National Coal Association is forecasting that imports are going to weaken in the second half of the year. “Demand isn’t booming as it’s supposed to,” Su Chuanrong, executive director-general of group, told Bloomberg News last week.
One explanation can be found in the floods that have affected almost 20 million people across the country in recent weeks. After a run of dry years, China’s hydroelectric dams are filling up. Already in March, hydro generation had grown almost 22% from a year earlier, the fastest pace in four years. Last month, output was 113.6 billion kilowatt-hours, a record for June.
China is seeing headlong growth in wind, nuclear and solar power as well as natural gas, but hydro is the most important challenger to coal, accounting for almost a fifth of generation compared with about 10% for wind, nuclear and solar put together. As a result, all that water backed up in reservoirs and needing to be discharged before more rains come means that hydro is likely to eat into coal’s share of the market until levels start to subside later in the year.
Things could be still worse for coal if signs of weakness in the economy become more pronounced. Electricity generation as a whole is still rising quite fast in China, up about 5.5% year-to-date from 2018. If demand for power starts to slow more dramatically, the bigger hit is likely to be taken by coal generators that have to buy fuel for every kilowatt-hour they produce, rather than hydro stations that are underutilized and have to release water anyway to maintain reservoir levels.
This isn’t yet the start of terminal decline for China’s coal sector. About half the country’s coal generators have long-run costs that exceed their revenues, according to a study by Carbon Tracker, a financial think tank that’s skeptical of fossil fuels. Nevertheless, the industry retains powerful support from provincial governments and grid operators. Thermal generation, including gas, hit a record 477.6 billion kilowatt-hours in December.
Something eventually has to give. As we’ve argued before, the coal boomlet that China has experienced over the past two years has owed a great deal to a temporary dry patch in its hydro-rich southwest. That now appears to be receding – and, with it, the prospects that the black stuff can see much further demand growth in its biggest market.