China needs more coal to avert a power crisis — but it’s not likely to turn to Australia for supply

China is facing its worst power crisis in years due to a coal shortage. While Australia has the coal Beijing needs, the world’s second-largest economy is unlikely to reverse an unofficial ban on Australian coal imports anytime soon, analysts told CNBC.

That’s despite recent media reports suggesting that China is releasing small quantities of Australian coal that was stuck at Chinese ports for months due to the ban.

“Reports that small quantities of Australian coal were allowed to clear customs in China have increased speculation that Chinese authorities will look to relax the import ban on Australian coal,” Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank of Australia, told CNBC.

“We don’t think Chinese authorities will relax China’s ban on Australian coal this winter,” he said.

Late last year, China stopped buying Australian coal. That happened as trade tensions between the two countries soared after Canberra backed a call for an international inquiry into Beijing’s handling of the Covid-19 outbreak.

Before that, Australia was a major coal supplier to China — in 2019, some 38% of Chinese thermal coal imports came from Australia.

China relies heavily on coal for power generation.

Since mid-August, at least 20 provinces across the country have reported power cuts of varying extent. That was due to several factors including a shortage of coal supplies, tougher government mandates to cut emissions and higher manufacturing demand as the global economy bounces back from pandemic lows.

Officials have reportedly urged top state-owned energy companies to secure supplies for the upcoming winter at all costs.

But analysts say Beijing will not likely lift the import restrictions on Australia anytime soon.

Instead, they predict that China will look to boost its own coal production, tap on other international suppliers and push its industries to curb output and emissions.

There are no signs that China will allow companies to purchase new shipments of Australian coal, according to Rory Simington, principal analyst at Wood Mackenzie.

“The political situation hasn’t improved at all,” he told CNBC’s “Squawk Box Asia” in mid-October. “This is largely a political issue and not an economic one, and, yeah, no signs of any easing on the ban on new cargoes.”

Beijing may also look to other countries for more coal.

“China is likely to push Indonesian suppliers for more coal but they are nearly at peak capacity,” Abhinav Gupta, a dry cargo research analyst at shipbroking firm Braemar, told CNBC earlier this month.

“China has also been trying to get more Mongolian and Russian coal to cater to its demand; however, there is some competitive pressure for Russian coal from the European buyers. We have also seen China buying more coal from suppliers in the Atlantic, such as US and Colombia,” Gupta said by email.

Dhar from Commonwealth Bank said that despite the informal ban on Australia, China’s thermal coal imports have held up “fairly well” due to a growing volume of supply from Indonesia and Russia. Between January and August, Indonesia accounted for roughly 57% of China’s thermal coal imports, he said.

Australian thermal coal at Newcastle Port, which is the benchmark for the Asian market, surged this year despite China’s import ban, according to commodity price provider Argus.

“The main driver of current thermal coal prices, particularly from Australia, is demand in North Asia ahead of this winter,” said Dhar. He added that Australian coal prices would likely depend on how cold the upcoming winter turns out.

Elevated coal prices are unlikely to immediately fall even if China lifts the import ban on Australian coal, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital.

“I doubt if China lifts the import ban that it would have much impact on Australian producers as they would just redirect back to China but still get the same price,” he said in an email. “Ultimately, the sky high prices won’t be sustained but they may still [be] high for a while yet.”

Australia’s export earnings have held up well despite the coal ban and a sharp drop in iron ore prices, Oliver said.

Commonwealth Bank’s Dhar said that if Beijing resumes buying coal from Canberra, it would only add to the demand for Australian coal and support prices further.

Still, Australian officials have slammed China for the trade sanctions that extend to other export items — such as wine and barley.

In a statement to the World Trade Organization last week, Australia said: “China says that these actions reflect legitimate trade concerns; but there is a growing body of information that demonstrates China’s actions are motivated by political considerations.”