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China’s coal futures have reached all-time highs as floods have exacerbated the energy crisis


China’s coal futures have risen to record levels as floods shut down dozens of mines and displaced more than a million people, cut off the country’s main source of electricity and exacerbated the global energy crisis.

Coal futures traded on the Zhengzhou Commodity Exchange rose 11.6 percent to an all-time high of Rmb1,408.20 ($ 218.74) a tonne on Monday.

The CSI coal index of large mines listed in Shanghai and Shenzhen rose 2.1 percent, partially reducing losses compared to last week, when prices fell on government orders to increase coal production.

The floods in the central province of Shanxi over the weekend put further pressure on Beijing to control the growing energy crisis that threatens to hurt the recovery of the world’s second-largest economy. China’s problems come when price volatility in the global energy market sends countries to collect electricity supplies at inflated prices.

The lion’s share of China’s domestic coal comes from Shaanxi, neighboring Shaanxi Province, and the Inner Mongolia region. Other local factors, including anti-corruption campaigns in the coal industry and the closure of mines to reduce air pollution surrounding national events, have created electricity rations for industrial and in some cases residential users.

“We expect power to be cut off and production to be disrupted as a result,” said Michael Taylor, Moody’s chief credit officer for Asia-Pacific. “But if they continue for an extended period, such as winter, the effects will spread to the domestic – and potentially global – economy.”

According to figures released by the provincial government, the floods in Shanxi have displaced about 120,000 people, forced the closure of 60 coal mines and damaged more than 190,000 hectares of crops.

Other extreme weather events have also contributed to China’s energy crisis, with unexpectedly dry weather in the south hampering hydropower generation this year.

The power crisis, which has strained global supply chains, could also be blamed for greater policy confusion as China seeks to meet ambitious green energy goals.

High international and domestic coal prices and strict restrictions on what power producers can charge have made it financially ineligible to operate many coal-fired power plants.

But last week, China’s cabinet, the State Council, said it would allow prices to rise by up to 20 percent to encourage power generation, which would jump from the previous 10 percent limit. Beijing has instructed miners to dramatically increase production.

Analysts say the impact of the breakdown in China’s energy market could spill over into global electricity prices. At Moody’s, Taylor warned that chronic power shortages in China could lead to a decline in factory output, which “could disrupt supply chains across the Asia-Pacific Ocean that could maintain existing order, which would also increase the cost of the chain.”

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