Coal Pricing in China: Is It a Bit Too Crude?

Abstract

China is a global leader in methanol production volume, while coal is a major feedstock. The country also has the world’s largest commercial coal-to-methanol operations. Coal-based methanol is used widely within China and is a competitive substitute for gasoline. Owing to this, it is plausible that the price of coal may be linked to international crude oil prices, with methanol prices serving as the connecting channel. We add supporting evidence to a recently emerging area of literature and observe statistically significant relationships among the three prices, and, therefore, the influence from international crude oil and methanol prices on the coal price determination in China. This paper investigates the relationships among these prices for the period from January 2010 to December 2019 through spectral Granger causality analysis, alongside more traditional cointegration tests to develop a comprehensive picture of causal association between the price series in both the frequency and time domain. Cointegration is found in our tri-variate system while the frequency domain Granger causality tests reveal the long-run causality in all directions except from crude oil to methanol, thus, emphasizing the structure of coal price dependence. According to the generalized impulse response functions, the coal price reacts positively to shocks in crude oil prices.