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China’s utilities face rising H2 coal bill as mine safety checks crimp supply

China’s coal buyers are bracing for prices to rise in the second half of the year, from already near-record levels, as Beijing’s drive to boost domestic mine safety cuts into local output even as booming imports may be reaching their natural limits.

Beijing is striving to strike a balance between increasing supplies to cool record prices that have squeezed its coal-reliant utilities while improving mine safety. In July, local media reported more than 20 mines in major coal hub Shaanxi province were shut for safety checks after a flooding accident.

China could seek to further step up imports from countries such as Indonesia, Russia and Mongolia, but industry watchers question how much more could actually be delivered.

“More coal is clearly needed, both in the balance of the summer and also to restock before the upcoming winter, but stronger supply brings risk of more accidents,” said James Stevenson, a coal analyst from consultancy IHS Markit.

China’s production fell almost every month through the first half, while inventories at coal power plants by end-June were 16% lower than the same period last year at 110 million tonnes, data from China National Coal Association showed.

Beijing has been striving to cool prices by releasing national reserves, and the state planner has asked coal producers to increase output.

But at the same time China’s safety administration has cautioned companies not to produce beyond targets to ensure safe operations, said a manager from a coal mining group in Henan province, who declined to be named because he is not authorised to talk to media.

In another sign of shortages, a producer from Anhui province said his company has had to cut coal supply to industrial customers, such as cement factories, to meet utilities’ needs first.

Traders and analysts expect coal imports will rise in the coming months, after dropping 19.7% in the first half of the year from the same period in 2020.

“We expect that Indonesian supply will improve in the second half now that rains have mostly eased, though an equipment shortage there might limit upside,” IHS Markit’s Stevenson said.

The tight supplies pushed China’s benchmark Qinhuangdao thermal coal prices SH-QHA-TRMCOAL to a record 1,080 yuan ($167.06) a tonne on Friday, adding to costs for coal-reliant utilities that can’t be passed on to consumers.

As losses pile up, the National Energy Administration has warned that some coal-fired power plants in China’s northeast and northwest could shut.

“Power plants do not have incentives to generate power at current prices,” said a manager from state-backed power company Huaneng Group, who declined to be named as he wasn’t authorised to speak to media.

“If the prices continue to stay at this level, no one can survive.”
Source: Reuters (Reporting by Muyu Xu and Florence Tan; Editing by Kenneth Maxwell)

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