China power crisis looks set to spur rush for the dirtiest fuel

Chinaspowercrisis looks set to spur it to import morecoalfrom a wider range of producers, putting it into competition with European and Indian buyers that are also snapping up more of the dirtiest fossil fuel.

More than two-thirds of Chinas electricity comes fromcoal-fired plants and, while more than 90% of the fuel it uses is mined locally, its difficult to raise local output at short notice. Looking offshore is the easier option, but thats been complicated somewhat by Beijings decision to ban imports from Australia — the worlds second-biggest exporter — late last year.

It isnt easy to ramp up local coalsupply, given the low investment in new mines in recent years, Bloomberg Intelligence analystMichelle Leungsaid in a note. Over-miningis also strongly prohibited amidsafetyconcerns, she said.

Instead, China is likely to try and increase purchases from traditional sources. Jilin province will seek morecoalfrom Indonesia, Russia and Mongolia to ensurepowersupply and heating, GovernorHan Junsaid in a statement.

Asias largest economy could also look farther afield to coalexporters like SouthAfrica, Colombia, the US and Canada, putting it into competition with buyers in other parts of the world and adding more impetus to global price rallies. European electricity producers are snapping upcoalas a shortage of naturalgasforces utilities to burn it to cope with their ownpowercrunch, while India is also running low on inventories of the fuel.

Given thecoalshortage in the country, we can expect China to ramp up its buying activity and most of it is likely to come from Southeast Asian markets due toproximity, saidAbhinav Gupta, a dry cargo research analyst at Braemar ACM Shipbroking. Most of thesecoalproducers are at peak capacity, which may tighten thecoalmarket and push up prices.

Beijing could of course decide to ease the ban on Australiancoalimports, although that may not be politically palatable. BIs Leung doesnt think its likely, althoughRalph Leszczynski, head of research at shipbroker Banchero Costa & Co, reckons its a possibility. Soon the Chinese government might be forced into easing the ban on Australiancoal, as that would allow morecoalto be imported and ease some pressure on domesticcoal prices, he said.