Commodity Derivatives

What is the outlook for Chinese coal demand moving into 2011?

Harsh winter weather forecast for the northern hemisphere could put China in a difficult position in 2011 as it struggles to meet demand for energy.

The United States is addicted to oil; China has the coal coal habit. China is now the 2nd largest net importer of thermal coal that it uses for power generation. Policy makers [in Beijing] are mulling an annual cap of between 3.6 billion tons and 3.8 billion tons in the next five-year plan, running from 2011 to 2015, the state-run Xinhua news agency reported earlier.

State-run media reported that Beijing is considering capping domestic coal output in the 2011-2015 period, partly because officials worry miners are running down reserves too quickly to meet the needs of a rapidly expanding economy. The possibility of tighter controls would restrict China’s mining sector as domestic demand has grown year on year by 10 percent in the past decade.

China's energy conundrum

It’s consumption in 2008 of 1.37bn tonnes made it a net exporter and whilst it grew an additional 83m tonnes in 2009, local demand couldn’t keep pace and its mines were only able to contribute a paltry 4m tonnes, this pushed it over the line to become a net importer.

Consumption at the moment is 43 percent of the world’s coal reserves and the challenge ahead is that it only has 14 percent of the world’s reserves to call on.

So what does this mean?

China’s addiction to its own coal reserves will create much angst over the coming years as it requires over 70 percent to meet its own internal demands. The forecast for another 400 or more coal fired power plants over the coming decade will create more supply shocks as it produces and consumes nearly 50 percent of the total world production.

Similiar issues have faced the west over the past decades with its addiction to crude oil and with current daily usage at 86mbpd and forecasted growth by 2027 to touch 107mbpd then the globe...