(Bloomberg) -- The surge in international coal prices could upset China’s policy of linking its electricity rates more directly to the cost of its mainstay fuel, risking another blow to growth for the nation’s sluggish economy.

Asia’s coal benchmark surged to a four-month high as concerns that the conflict in Ukraine could disrupt energy supplies adds to the impact of already booming fuel demand. “We’re seeing a scramble for all energy units, including coal,” said Peter O’Connor, an analyst at Shaw & Partners Ltd in Sydney. “As long as those tensions continue, we’re likely to see prices remain elevated.”  

China’s state planning agency on Thursday announced another round of measures to cool prices, threatening to intervene if a certain range is breached. But the increases in price that followed Indonesia’s short-lived ban on exports earlier this year have already shown that China’s coal market, as vast as it is, can’t fully insulate the country from rising energy costs elsewhere. 

And the factors that state planners can’t control have broadened immeasurably. Among other energy sources, oil has topped $100 a barrel, and some Chinese gas prices have hit records, as last year’s global power crunch rolls into a new crisis over supply caused by the Russian invasion of Ukraine. 

China’s heaviest power users are open to potentially unlimited increases in rates as part of last year’s reforms to address the energy shortages that struck in the fall. It means that if Beijing can’t keep a lid on coal prices, the nation’s industrial base will be far less protected from higher power costs than it would otherwise have been.

Ukraine Invasion

The invasion of Ukraine could, however, unlock new coal supplies for industry. If Russian commodities are shut out of international markets as a result of sanctions, more of its coal would probably flow to China, according to a note from Fengkuang Coal Logistics. Russia is already its second-biggest supplier, and the two nations struck a deal last week that would double trade within the next four to five years.

China’s power reforms are designed to allow market forces to shape demand and prevent its most energy-thirsty sectors from gorging on electricity. The government wants to force industry to conserve more energy and emit less as it seeks to make its economy more efficient and advance its longer-term climate goals.

The shift is a recognition that last year’s power crunch was caused in part by Beijing’s efforts to rescue its economy from the pandemic, which saw electricity costs lowered to help industries raise production. As the coal price increased, utilities were forced to either take losses or curb output, which only worsened the power shortages. 

China now allows power generators to pass on higher fuel costs to industrial users. In a release on Thursday, the National Development & Reform Commission made plain that 570 to 770 yuan a ton is the reasonable level for medium and long-term coal contracts, and in the long run those should dictate the price of electricity.

The government has amped up its displeasure in recent weeks at the speculators it blames for inflating the coal market. More pertinently, it has backstopped its price caps with a massive ramp-up in output to record levels, which is its best bet to preventing a repeat of the rally that saw prices nearly triple last year. 

Today’s Events 

(All times Beijing unless noted)

  • Shanghai exchange weekly commodities inventory, ~15:30

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The Week Ahead

Monday, Feb. 28

  • Nothing major scheduled

Tuesday, March 1

  • China official PMIs for February, 09:30
  • China Caixin factory PMI for February, 09:45

Wednesday, March 2

  • Nothing major scheduled

Thursday, March 3

  • China Caixin services & composite PMIs for February, 09:45
  • USDA weekly crop export sales, 08:30 EST

Friday, March 4

  • China weekly iron ore port stockpiles
  • Shanghai exchange weekly commodities inventory, ~15:30

Saturday, March 5

  • Annual National People’s Congress begins in Beijing

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