LONDON, June 20 (Reuters) - China's coal production has slowed slightly, after rapid growth in the last two years, as the energy supply situation has become more comfortable, allowing the government to focus on long-term structural changes.

China's mines produced 1,858 million tonnes of coal in the first five months of 2024, according to data published by the National Bureau of Statistics.

Production fell by 54 million tonnes (-3%) compared with a year earlier, after growth of 98 million tonnes (+5%) in the first five months of 2023 and 193 million tonnes (+12%) in 2022.

Some production was replaced by imports, which increased by 23 million tonnes (+13%) between January and May from a year earlier, according to separate data from customs.

Some imports are higher-quality specialist coals used for steelmaking, while others are lower-quality coals for power generation that landed at ports along the south and east coasts, far from the main coal-producing areas.

Given constraints on the domestic rail network and the relatively high cost of transporting bulky coal overland it can be cheaper to import by sea from Indonesia and Australia for power generators in the south and east.

Nonetheless, there seems to have been a real decline in demand for coal, after two years in which the government ordered flat-out growth to avoid any repeat of the fuel shortages and electricity scarcity in the autumn of 2021.

Chartbook: China coal production

In 2023, Shanxi was the top coal producing province, with output of 1,357 million tonnes, and has experienced the greatest increase in output in recent years, up from 778 million tonnes in 2016.

The province contains some of the largest and most efficient mines but its production declined by 82 million tonnes (-15%) in the first five months of 2024.

For two decades, the central government has pressed for the closure of old, small, inefficient and dangerous mines to concentrate output on the most modern, efficient and technologically advanced ones.

As a result, the top four producing areas of Shanxi, Inner Mongolia, Shaanxi and Xinjiang, all located in the north and northwest, accounted for 82% of national output in 2023 up from 72% in 2017.

But the government has announced Shanxi’s coal output will “voluntarily reduce for the first time this year after seven consecutive years of rapid growth,” according to the government-run news agency Xinhua.

“Shanxi will focus on the safe, efficient, green and intelligent development of its coal industry in 2024, further optimize the production capacity structure, and increase the proportion of advanced production capacity”.

The province is also committed to increasing its production of non-fossil energy from abundant wind and solar sources on the northern plains as part of its industrial modernisation.

BREATHING ROOM

In 2022 and 2023, Shanxi’s massive expansion of coal production played a critical role ensuring energy security as the central government has grappled with rapid growth in electricity consumption and erratic hydro generation.

But the large-scale deployment of wind and solar generation has started to satisfy an increasing share of electricity load growth, relieving some of the pressure on coal-fired generators.

Prolonged drought sharply cut hydro generation in late 2022 and throughout 2023, forcing the electricity system to rely on record amounts of thermal power generation, mostly fired by coal.

But hydro generation has rebounded following heavy spring rains in 2024, which have also enabled the country to make full use of newly commissioned massive hydro dams on the Yangtze river system.

Thermal power generation, mostly from coal-fired generators, fell slightly in May 2024 compared with the same month a year earlier as output from hydro, solar and wind soared.

More renewable generation has created breathing space for the central government to rationalise coal production and plan for a gradual transition in its role in the electricity system.

The National Development and Reform Commission, the top planning agency, has announced plans for a “coal capacity reserve system” with potential to supply up to 300 million tonnes of fuel per year by 2030.

Rather than stockpile fuel, which would deteriorate over time, the reserve will consist of high-quality mines held in reserve and able to surge extra production quickly in an emergency.

The capacity reserve is intended to respond to “extreme situations” including “severe fluctuations in the international energy market, adverse weather conditions, and dramatic changes in supply and demand stability”.

Presumably, it could be used to offset future droughts, heatwaves, extreme winter cold, gyrations in imported gas prices, or any embargo imposed by the United States and its allies.

Details about how the reserve system will operate remain unclear but it is likely mines in Shanxi as well as Inner Mongolia, Shaanxi and Xinjiang will play a major role.

Planners seem to envisage an electricity system in which coal plays an essential role as a reliability reserve while an increasing share of existing load and all load growth is met by renewables, hydro and nuclear.

The slight slowdown in coal production in 2024 after two years of breakneck growth is a harbinger of how the system will be transformed over the rest of the decade.

Related columns:

- China's rising hydro and solar set to cap coal use in 2024 (April 24, 2024)

- China's hydro generators wait for the rains to come(March 24, 2024)

- China's renewables rollout signals future peak in coal(January 19, 2024)

- Drought-depleted hydropower drives China to turn to coal

John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X https://twitter.com/JKempEnergy (Editing by Miral Fahmy)