BEIJING: China's utilities are readying for a months-long buying spree to shore up thermal coal reserves ahead of the hotter summer months, sources say, in a strategy aimed at averting a supply crunch but which may drive prices higher.
Top power generating companies will need to purchase more than 40 million tonnes of thermal coal by the end of June to provide a cushion of supply during the third quarter, the second-highest demand period of the year after winter, according to internal government calculations provided by a source briefed on the matter.
That is 14 percent of China's quarterly output, or 15 days of use. The estimate is based on stocks of 90 million tonnes at the nation's thousands of utilities and a target to reach at least 130 million tonnes by June, the source said. That target is equivalent to almost half of the utilities July to September consumption.
The plan is to avoid a repeat of last winter's chaos when government mining cuts tightened domestic supplies, triggering a rally in prices in the world's top coal consumer and forcing Beijing to take emergency steps to boost supplies to avert an energy crisis.
"China could have a bigger coal crisis than last year," said an Inner Mongolia-based purchasing manager with China Resources Power Group on Wednesday.
Utilities including China Datang Corp and China Guodian Corp typically replenish stocks after the winter, but this year they will need to load up more than usual because stocks are at multi-year lows, two analysts and two utility sources said.
The stockpiling demand could spur higher thermal coal futures prices. Futures have already rallied 26 percent this year and hit a record 566.20 yuan ($82.17) per tonne earlier this month.
Prices are surging as China's government clamped down on illegal mining and required miners to shut production as way to combat pollution and overcapacity.
The National Development and Reform Commission (NDRC), China's economic planner, did not respond on Wednesday.
A hotter-than-average summer would have a blistering impact on coal-fired power generation demand. Long-range weather forecasts show temperatures in China's two biggest cities Beijing and Shanghai will be slightly higher than average in July to September.
Another challenge for the power market is recent low rainfall amounts, which last month crimped hydropower output, China's second-largest power source behind coal.
"The first quarter was particularly dry compared with 2016, so coal generation went up quite aggressively. Power demand will remain strong and coal will see more upsides when hydropower falters," said Frank Yu, Principal Consultant, APAC Power & Renewables, for Wood Mackenzie.
Coal inventories at major utilities stand at 50 million tonnes, their lowest in April since at least 2014 when they were 72 million tonnes, according to a survey by consultancy Fenwei.
Utilities consumed 300 million tonnes of coal in the July to September period last year, Fenwei said.
The Inner Mongolia buyer said he has 60,000 tonnes of coal, or about ten days of use, which is "very low".
He will need to increase stocks to almost 100,000 tonnes, or 15 days of use, by the end of June to see him through the summer months.
Illustrating rising concerns about coal prices in Beijing, the NDRC has issued two statements this week saying it will take steps to get prices to return to "reasonable" levels before the summer months.
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