Around March, Xi Jinping was making explicit reference to anticorruption measures around the coal sector in Inner Mongolia. The collapse in imports and production over this period likely led to a shortage of approximately 30MT attributable to lost production and another 12MT from Mongolian imports. If you look at global seaborne coal imports, that is about two months of global imports, including China.
In gas equivalent terms, we know China takes about 330kg of coal per MWh of power, and a combined cycle gas turbine uses around 7GJ of gas per MWh. All in you are looking at bump in LNG demand to fill this hole equal to 5% of *annual* gas demand in Europe per IEA data.
What can or should we take away from this?
- Firstly that global energy markets are tightly coupled now via fossil fuels. Expansions in LNG infrastructure and pipelines mean that regional prices should in general be more tightly correlated.
- European gas demand is falling but varies with renewable generation and weather. More storage of gas but also pumped hydro and nuclear will be required.
- China is so big that seemingly obscure provincial corruption crackdowns in key areas can roil energy markets.
- China does not seem to be stepping back from mass campaigns and the like any time soon.
- The cost of fossil fuels is not just emissions but also in exposure to this volatility – if the energy transition seems expensive, remember that heating your home this winter in Northern Europe means you are paying a premium for China’s institutional and political volatility.
With China’s inventories low and winter heating and power demand starting to rise soon China can be expected to increase imports – although this will likely last only until China can supply its own needs again.