China is caught between power shortages and the political cost of lifting its ban on coal from Australia as Beijing struggles to contain rising prices after cutting off imports from its leading commodity supplier.
Reports differ widely on the origins of China's unofficial ban against imports of both Australian thermal coal for power generation and metallurgical or coking coal for steelmaking.
In March, Argus Media traced the start of the policy as far back as the previous April, while more recent reports have cited last October as the effective date of the undeclared embargo.
News of the restriction spread quickly during an early winter power crisis when the Communist Party-affiliated Global Times reported on Dec. 13 that China's top planning agency had met with 10 power companies, giving them "approval ... to import coal without clearance restrictions, except for Australia."
Reports on the cause of the rift have also varied widely, with some citing Canberra's decision in 2018 to exclude Chinese telecom companies ZTE Corp. and Huawei Technologies Co. Ltd. from developing Australia's 5G network due to security concerns.
Many other sources of bilateral tension have emerged, including differences over China's territorial claims to the South China Sea, Australia's offer of visas to Hong Kong democracy advocates and its support for policies of the United States.
"We urge Australia to stop interfering in Hong Kong affairs and China's internal affairs in any form, to avoid further damage to China-Australia ties," Foreign Ministry spokesman Wang Wenbin warned in March.
An annual study by the Australian National University found a 61-percent drop in China's investment in the country last year, the South China Morning Post reported.
Since then, several reports have cited Australia's call for a thorough investigation of the origins of the COVID-19 pandemic as the leading cause of the coal ban.
Beijing has also taken out its anger by raising tariffs and effectively barring imports of other Australian products including wine, barley and cotton, while imports of essential commodities like iron ore have continued at a higher cost.
This week, the feud intensified at the tit-for-tat level as Australia brought a complaint against China's wine and barley tariffs before the World Trade Organization. China responded quickly by filing a dispute against Australia's anti-dumping measures on Chinese products including railway wheels, wind towers and stainless steel sinks.
Whatever the motives may have been for singling out Australia for sanctions, China's decision on coal has gradually grown from an affordable penalty into a critical cost as recovery-driven demand and summer power use rise.
In the first five months of the year, electricity consumption had already climbed 17.7 percent, the National Energy Administration reported, setting the stage for summer power shortages and high coal demand.
Domestic coal production of 1.62 billion metric tons rose 8.8 percent in January through May, while imports of 111.17 million tons fell 25.2 percent, the National Bureau of Statistics said, reflecting the Australia ban.
"China, which used to count Australia as its second- biggest supplier of coal, appears to be paying a heavy price for its ban on imports from the world's second-biggest shipper of thermal coal and the no. 1 supplier of coking coal used to make steel," wrote analyst Clyde Russell in a Reuters commentary this month.
Paying twofold
China is now paying about twice as much as Australia's Newcastle coal price for lower-quality fuel from other suppliers, according to figures cited by Russell.
"Overall, the various coal price benchmarks across Asia reflect not only the strength of underlying demand, they also bear witness to the disruption of China's ban on imports from Australia," he said.
Conditions in China have contributed to price pressures in the country that accounts for about half of the coal production and consumption in the world.
This year's surge in production has also had a high human cost. In April, the government launched a series of safety inspections at China's mines following a rash of deadly accidents caused by pressure to boost output in response to demand.
Price increases have magnified the impact of the Australian coal curb, but China's government has shown no sign of reversing course.
"My instinct is that the leadership will not back down on the Australian embargo," said Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research.
"The embargo and the Australia grudge match are much too prominent internationally to back down and lose face," Herberg told RFA.
"I suspect they are hoping it will be a fairly temporary squeeze on coal and power, and will resort to well-worn strategies of short-term price controls and administrative pressures," said Herberg. "They will tough it out rather than back down on the Australia fight," he said.
On June 9, Bloomberg News reported that the National Development and Reform Commission (NDRC) planning agency was considering a cap on coal prices to deal with the price spike. News of the non-market measure seemed likely to exert a drag on volumes as the loss of incentives raises the risk that suppliers will hold back.
On June 10, Reuters reported that the government had also sent inspectors to coastal coal ports to crack down on hoarding.
"Power plants need to build up inventory before the peak summer demand period arrives. But at the moment, a lot of coal is piled at ports in the hands of traders who are holding it for higher prices," a trader at Caofeidian port in northern Hebei province told Reuters.
The pressures added to an inflationary surge in commodities last month as China's producer price index (PPI) soared 9 percent from a year earlier, the biggest increase since 2008.
Nearly forgotten in all the stress over power shortages and inflationary pressures is President Xi Jinping's pledge last September to reach a peak in carbon emissions before 2030 and achieve carbon neutrality before 2060, goals that will require a phase-out of coal.
The Wall Street Journal reported on June 9 that the NDRC has "put the brakes on attempts by environmental officials to reduce carbon emissions," giving priority to economic growth over the pledge to meet climate goals "for now."
The report, which cited "people familiar with the matter," may mark a turnaround from the situation in January, when advocates from the government's Central Environmental Inspection Team blasted the NEA in a public report for failing to advance Xi's climate agenda and instead favoring economic growth.
According to the Journal, the NDRC has watered down the national carbon trading scheme which was scheduled to go into full operation this month, limiting its scope.
Unclear intentions
China has also sent ambiguous signals on plans for building new coal-fired power plants.
At a meeting of the International Financial Forum in Beijing on May 29, the chief economist of the Industrial and Commercial Bank of China, Zhou Yueqiu, announced that the giant lender would take the first steps toward ending financing of coal-fired plants, but without saying when.
Zhou said the bank would "establish a road map and timeline for the gradual withdrawal of coal financing," the Morning Post reported, adding that observers viewed the move as "significant."
But the highly qualified statement fell far short of the demands of climate activists for an immediate halt to new coal projects in China. Groups including Greenpeace have been calling for a moratorium on new plants since 2014.
China's coal and power shortages this year suggest that such a step is still a long way off.
The risk to the economy and social stability may be seen as simply too great to suffer a setback in growth, particularly in the Communist Party's centennial year.
But higher coal costs may be an inevitable consequence of avoiding power shortages, especially if the ban on Australian coal is maintained.
On June 17, an NDRC spokesperson said that the electricity problems in the southern region had started to ease, but Bloomberg reported that 80 percent of power providers in Guangdong province had suffered losses when they were forced to sell power for less than their costs.
"One thing appears certain. Chinese consumers will be paying significantly more for coal than consumers elsewhere able to take Australian material," said Rory Simington, principal analyst at the Wood Mackenzie consulting firm, in a note quoted by the Morning Post.
Easing the ban would also have consequences, sending a signal that China is not strong enough to impose sanctions on commodity suppliers who differ with its political views.
China's predicament may be another side of its vulnerability to energy security risks, with its growing dependence on imports of oil, natural gas and now coal.