A rise in coal prices and a power shortage pose risks to China’s economy

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A rise in coal prices and a power shortage pose risks to China's economy
Chinese workers commute as smoke billows from a coal fired power plant in Shanxi, China, on Nov. 25, 2015. (Kevin Frayer/Getty Images)

Shipping prices for coal at China’s Qinhuangdao port increased to $131 per metric tonne on May 28 due to tight supply, up from $85 per tonne the previous year, according to CCTD.com.cn.

The power outage coincided with a rise in coal prices. Guangdong Province, China’s largest GDP contributor, has been limiting business power usage in many cities, including Guangzhou, the province’s capital, and Dongguan, the Pearl River Delta’s manufacturing hub. Due to power outages, some factories are forced to close for three or four days per week.

In an exclusive interview with The Epoch Times, Hong Kong financial analyst Katherine Jiang Tianming stated that coal demand and power consumption vary seasonally and typically peak in the summer and winter when residential demand increases. However, it is unusual for coal prices to rise and power shortages to occur during the off-season months of April and May. People.cn, a CCP (Chinese Communist Party) media outlet, blamed the power shortage on China’s rapid economic growth. However, the CCP’s control over market supply is noteworthy, particularly in the coal mining sector.

After the heating season, China’s coal production decreased. The total coal production volume decreased by 1.8 percent year on year to 320 million tonnes in April 2021, according to the National Bureau of Statistics, following a 0.2 percent drop in March 2021 when production was recorded at 340 million tonnes. Imported coal fell by 1.8 percent and 29.8 percent year on year in March and April, respectively.

In one of its coal industry reports, Kaiyuan Securities, a Chinese security company, stated that the government imposes various restrictions on domestic coal production. These restrictions include an anti-corruption campaign in Inner Mongolia’s coal mining sector, sales volume control through the issuance of “Coal Sales and Management Tickets,” and coal mine safety inspections.

Inner Mongolia, one of China’s most important coal mining provinces, is cracking down on illegal coal mines with an anti-corruption campaign to investigate the operational process of coal mines over the last 20 years, including coal mining planning, investment review, resource allocation, environmental impact assessment, and mining rights approval. The anti-corruption campaign, according to People.cn, has revealed 1,513 coal mines.

The government issues the Coal Sales and Management Ticket (CSMT), a one-of-a-kind product in China’s command economy, to control coal sales volume. In China, every unit of coal must be sold along with the CSMT, the value of which is set by the government, so that coal output can be effectively controlled. According to an industry report by TF Security, many coal mines in Erdos, a city in Inner Mongolia, had to stop production at the end of April 2021 due to CSMT exhaustion, which exacerbated the tight supply.

A notice issued on March 18 by the People’s Republic of China’s Ministry of Emergency Management requiring safety inspections of coal mines in Shanxi, Inner Mongolia, and Shaanxi added to the shortage.

According to Jiang, the CCP’s 100th anniversary is approaching, and it requires a quiet period free of large coal accidents that could cause social unrest before July 1. As a result, coal mines will be underutilised, resulting in lower coal output and rising coal prices. Under the current tariff setting mechanism, which lacks cost pass-through, the coal price rally will reduce profit margins at coal-fired power plants. Some coal-fired power plants may not run at full capacity in order to maintain a profit margin, exacerbating the power supply crisis.

The local government of Dongguan Nancheng district announced on its official website on May 28 that power restrictions could last until the end of the year due to power shortages. Similarly, “The Plan of Power Rationalization in Guangzhou,” which was approved on May 10 by the Guangzhou Municipal Industry and Information Technology Bureau, stated that there are no restrictions on the power grid, but rather a tight power supply in Guangdong Province.

Another reason for Guangdong’s power shortage, according to Jiang, is a decrease in imported hydropower from Yunnan, the province’s second-largest fuel source.

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Coal-fired power is Guangdong’s largest fuel source, accounting for 36.2 percent of total supply in 2020, according to the “2020 Annual Report of the Guangdong Power Market.” This is followed by hydropower imported from Yunnan Province, which contributed to 29.6 percent of the total power supply. According to bjx.com.cn, power transmitted from the Yunnan power grid decreased by 21.23 percent year on year in the first four months of 2021, due to insufficient hydropower supply in Yunnan caused by a lack of rain in 2021.

According to Jiang, “coal-fired power is more stable than renewable energy, which has a high intermittency due to natural resource constraints.” Hydropower, for example, can not function fully when the water flow is low. On cloudy days or at night, solar power is more likely to underperform. Because of its intermittent nature, renewable energy has a difficult time ensuring a stable power supply, as evidenced by the recent power shortage in Guangdong Province. ”

However, China is pushing for renewable energy in order to achieve carbon neutrality by 2060. Renewable energy has driven power sector installation and investment. According to the China Electricity Council, renewable energy accounted for 55% of new power generation capacity and 92% of power generation capital expenditure in the first four months of 2021.

“The CCP must strike a balance between renewable energy investment and power security,” said Jiang. “However, the power shortage in Guangdong suggests that the CCP has prioritised renewable energy development, as Xi Jinping has promised the world that China will achieve net-zero emissions by 2060.”

According to Jiang, the rise in coal prices would raise fuel costs for many enterprises that use coal, putting pressure on the market to reduce margins. Limiting power consumption will also limit economic activity. If this continues for the rest of the year, as predicted by the Dongguan Nancheng district’s local government, production will fall, raising prices and dragging the economy down.

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