China needs coal, and Australia has it. But something’s standing in the way

China needs to bolster its coal supply to avoid an economic slowdown this quarter, but Beijing’s icy relations with Australia could make that difficult, according to investment bank Mizhuo.

The world’s second-largest economy is facing a power shortage owing to a combination of factors. They include: extreme weather, surging demand for Chinese exports and a national push to reduce carbon emissions, as set out by President Xi Jinping.

China is an industrial powerhouse and the planet’s biggest emitter of carbon dioxide. The country generates most of its electricity by burning coal but the inventory of major power plants reached a 10-year low in August.

“While China unambiguously needs as much coal as it can get its hands on to avert a [fourth-quarter] slowdown due to the tyranny of rolling power shortages, geo-political tensions with Australia have waylaid the most convenient source of high-calorific coal from Down Under,” said Vishnu Varathan, head of economics and strategy for Asia and Oceania treasury department at Mizuho, in a note on Monday.

Late last year, China stopped buying coal from Australia — which used to be the biggest exporter of the commodity to the country. It came as trade tensions between the two countries soared, after Australia backed a call for an international inquiry into China’s handling of the coronavirus.

As a result, China turned to Indonesia, Mongolia, Russia and other countries to try and make up for the shortfall. Last year, reports said that Indonesian coal miners signed a $1.5 billion supply deal with China.

Indonesia is well positioned to benefit from the demand spill-over, but its ability to fulfil shipments may be a bottleneck, Varathan said.

China faces risks in procuring coal quickly due to a variety of constraints including logistics and regulations. That implies a “stutter in economic activity and attendant kinks in regional supply chain may not be fully avoided,” Varathan said.

Already, some banks have downgraded China’s growth prospects due to the power crunch.

Many observers appear to be worried about a “significant degree of energy price shock,” Varathan said.

China’s power shortage could lead to rise in prices for many export goods that could result in modest increase in consumer inflation in advanced economies, according to Kevin Xie, senior Asia economist at the Commonwealth Bank of Australia.

Restrictions on electricity supply will cut economic growth and exacerbate the slowdown caused by problems in China’s residential construction sector, Xie said in a note last week.

“Energy intensive industries will be most affected by electricity rationing. The combined share of the industrial sector in affected provinces with power rationing is about 14% of Chinese GDP,” he added.

So far, policymakers in Beijing have not given any indication of whether China will resume importing Australian coal. Media reports last week said Indian firms snagged about 2 million tons of Australian coal at a discounted price that were sitting in Chinese warehouses.