Friday, August 29, 2008

King Coal the Emperor of China

King Coal may be becoming the black sheep of the power industry in America, but it reigns supreme in China.

Chris Nelder, an energy financial consultant who has studied China's power needs for American investors, wrote in the Aug. 20 edition of “Energy & Capital,” that investors in coal stocks saw their holdings increase by 60 percent for the first half of 2008, but then drastically pull back to near the earlier levels by mid year.

“Curiously, it seems to have much to do with the Olympics,” he said.

Coal prices rose as China limited how much of the fossil fuel could be sold to other nations and imported more on the run-up to the Olympics.

But around June, the near future for coal in China suddenly got very black. China severely cut back its fossil fuel use -- especially coal -- in its massive effort to clean up the air for the Olympics.

China produces about 80 percent of its power with coal, Nelder wrote. The nation's demand for coal grew by 9 percent last year, and the Coal Sales & Transportation Association of China is projecting a 5.3-percent increase this year, or about 2.76 billion tons.

Last year U.S. consumption of coal was less than half that amount -- about 1.1 billion tons, the U.S. Energy Information Administration reports.

According to Nelder, about two-thirds of global coal consumption is used to fuel electric power plants with most of the rest used to make steel and cement.

China produces more steel than any other nation with more than double the output of the European Union, the number two producer based on tonnage.

Nelder says the U.S. Department of Energy estimates that 70 percent of the increase in global demand for coal over the next two decades will come from China and India. China's economic growth rate is running about 10 percent per year, with India close behind. U.S. economic growth is sluggish, with many claiming growth here actually is in recession.

Although China leads the world in coal production, neither it nor India can meet their demands with domestic mining, and both nations have slashed their exports to hoard enough for their own needs. That helped drive up the price of coal on international markets -- a boon to investors in the much-criticized industry.

China made out like a Silk-Road bandit and saw huge profits from its coal exports during that time. The China Business News reported that mid-year, the global price for coal was $54 per ton higher than the domestic price. The Chinese domestic price is state-mandated.

But in June, China curtailed its coal production. In restricting coal use, China's coal output fell 8 percent in July from June to 220 million tons.

Nelder notes recent information on Chinese coal is rare and most often published only in Chinese.

Even so, he says, the information isn't completely reliable and can't be verified. “But we use what we can get,” he said.

In 2003, according to the Chinese reports, China ran an 83 metric ton trade surplus in coal.

“Last year, that dropped to a mere 2 million, effectively taking 12 percent of the global trade in coal off the market,” he added. That brightened the financial picture for coal companies internationally, while U.S. criticism of the abundant, cheap fuel mounted.

But Nelder adds that coal inventories have been chronically low this year in China. Consumption rose during an early summer heat wave, and supplies couldn't keep up.

Li Xinfang of the State Grid, the country's chief grid operator, told Nelder supplies were only two-thirds of last year's peak.

“Then came the Olympics, and the kibosh on coal,” Nedler added.

As the air in Beijing cleared, China's coal imports fell 36 percent from May to June, and June imports were down 32 percent compared to last year.

Scaling back on the use of coal led to widespread and frequent outages. About half of China's provinces are now rationing electricity, with forced limits on local governments and priority allocation to the Olympic venues, Nelder added.

And it was lucky for China's image that the priority was enforced. Beijing invested over 20 billion yuan ($2.91 billion) to beef up the electric grid for the Games. And during the first day of the Olympics, peak power demand jumped 21 percent in Beijing, as tens of thousands of visiting westerners brought their energy gluttony with them.

But the Chinese people had less energy than normal, according to the China Electricity Council.

About 3 percent of the country's coal-fired generation capacity sat idle last month because of a lack of coal.

And according to the council, over a third of the nation's power plants, most of which were coal-fired, had net losses over the first five months of the year.

Even in Shanxi, China's top coal-producing province, 15 percent of the local generating capacity was shut down because of a lack of fuel. And this week, the State Grid Corp. reported that power output was down 17 gigawatts from last year.

In response, the Chinese government announced a 5-percent increase in electricity rates to restore profitability for beleagured, coal-fired power producers. Even so, according to estimates by BNP Paribas SA, a Paris-based banking group, the price of electricity in China is 30 percent lower than it should be if it accurately reflected the price of coal, running up the red ink in the Red Chinese budget.

But as the Olympics break through the finish line, coal stockpiles at China's power stations are increasing slowly. The central government is concerned (now that substance will matter more than image) that pre-winter supplies are too low for comfort, so it intends to further release its restrictions on mining and supplies.

Liu Tienan, vice chairman of the National Development and Reform Commission, this week encouraged power plants to stockpile coal early this year or power shortages would worsen as winter approaches. And China's General Administration of Customs announced it would increase coal imports to bring the grid back up to full power.

Nelder noted that on Aug. 9, the State Administration of Work Safety said China will increase coal production at its larger mines for the remainder of this year.

The problems facing the Chinese are typical of state-controlled economies, and are why communist countries have failed to provide their people with the quality of life found in capitalist nations.

But as western governments tinker with similar, widespread economic controls, and China resorts more to free enterprise, that balance may shift as the century advances.

source: King Coal the Emperor of China
Ely Daily Times, NV