People May Think I am Overreacting….

Thursday, January 24, 2008 4:43
Posted in category Uncategorized

Last week I posted a piece on a looming energy crisis in China entitled Why China’s Recent Drought Matters to YOU.  Didn’t get any comments, but a few people I have spoken to have played the threat of any economic impact down.

Well, if the fact that China is now  recalling ships as part of a national coal transport drive, then perhaps you’ll consider the fact that Coal shortages, transport problems cause power gaps and that the recent diesel shortages have made the problems severe enough for the central party to

issue an “urgent notice” on Wednesday to the country’s power generators, coal companies and railways to address an electricity shortage that has led to rationing in more than a third of China’s provinces in recent weeks.

and the problems will only get worse.

Perhaps I am overreacting a bit, but in the off chance I am right and the power starts rolling in and out, what would the impact be?

Sure, there are summer blackouts, but has anyone put together a plan to deal with a rolling blackout  that lasts through the spring and summer (assume drought conditions continue)?

On a wider sustainability issue, I there is a great article  The future: China changes the whole world where we the following paragraph will give you a sense of the amount of resources required to power China’s engine.

By 2006, China already consumed 32 per cent of the world’s steel, 25 per cent of the world’s aluminium, 23 per cent of the world’s copper, 30 per cent of the world’s zinc and 18 per cent of the world’s nickel.

To date, the second tier cities have yet to really achieve the same growth as the coastal cities, so a few more questions.

How much longer can China continue to grow and drive material prices up before a slowdown occurs?  After all, at 11.4%, China’s economy posts biggest rise in 13 years

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15 Responses to “People May Think I am Overreacting….”

  1. JD says:

    January 24th, 2008 at 5:57 am

    Add inflation, crazy price controls, overvalued stock markets, a real estate bubble, widespread corruption, day-to-day environmental devastation, and a significant global recession. A return to real reform and opening up is the only way to go. The slowdown in China will be sharp, fast, and greater than expected as confidence is suddenly popped.

  2. Duncan says:

    January 24th, 2008 at 7:48 am

    Negotiations over the “power coal” contract prices are currently underway, and there’s a certain element of politics here as the power generators and grids are pointing out (quite rightly) that it’s a tad unfair for them to be unable to pass on the cost of increases in the cost of coal (which has had a more flexible pricing regime in recent years). They may well be playing the same card that the oil majors have done over retail fuel prices.

    For a real laugh, see the Guangdong official’s comment in a recent China Daily report that they hope to redress their power shortfall by buying more pwoer from the Three Gorges. Because of course the hydro generators are doing so much better this year…. Does make you wonder whether it’s really wise spending billions on a system to transfer water from the “water rich” south to the north.

  3. Levin says:

    January 24th, 2008 at 8:34 am

    There are several constraints to China’s growth:

    supply of resources like iron, lumber, agricultural land, lumber, potable water, mineral.

    Energy sources: coal, electric power, oil, natural gas.

    These resources are not just constrained by what is located in China, but as a worldwide resource. And transporting these to China will consume energy, adding to the problems.

    Manpower: China’s growth in the last decade was mainly fueled with under employed manpower from rural areas. This source of manpower is now diminished. Drawing additional human resources from this is going to affect agricultural production. The aging population will also reduce this resource significantly in the next few decades, especially when those born after the war are retired.

    I have no idea which one of these constraints will become pivotal first, and when, and how trade-offs between them and importation of them can be used to extend the growth. This would be a great area for research.

  4. bandaranike says:

    January 24th, 2008 at 11:14 am

    Hi Rich

    I think Chinas fast economic growth is going to slow down depending on shortage of power in near future.

    China has today nearly half of the world’s biggest hydropower stations and has an impressive program to build many more. But Chinas energy program has a very mighty enemy, siltation, caused by environmental mistakes like deforesting huge parts of the highland. Billions tons of sand and gravel have gone into the rivers and have filled up many of the hydropower reservoirs. We are talking about up to 70 % less capacity in some of the major reservoirs. Three Gorges reservoir is almost new but silt has already caused problems.

    A filled up reservoir with low capacity can store less water to the dry season to produce electricity and is not at all efficient to regulate flooding in the monsoon season.
    This is not any news but the authorities have ignored it for many years.

    Middle Chinas economy is also very much depending on secure transports on Yangtze River.
    Last two months low water have had a big impact on the river traffic, a lot op ships has grounded on sandbanks that has been built up by siltation in the river..

    We are talking about the need of a huge dredging program in the inland to secure river transports and ensure the hydropower industry good opportunities to produce electricity.

  5. Falen says:

    January 24th, 2008 at 1:44 pm

    How much longer can China continue to grow and drive material prices up before a slowdown occurs?

    Chinese people, still poor. Fundamentally the slowdown will occur when people are no longer poor. Of course there are constraint on resources but ultimately the economy will grow until people are no longer poor.

    Environmentalists will foam at their mouth but Chinese will demand another two three US worth of automobiles and just as much energy usage.

  6. jim says:

    January 24th, 2008 at 8:46 pm

    Funny timing on this, but Shanghai Daily has an article about adding another power supplier: http://www.shanghaidaily.com/sp/article/2008/200801/20080125/article_346573.htm

    New power plants are being built in Anhui (next to coal mines) and the new lines connecting them to the city will be finished this summer.

    The problem today isn’t due to a shortage of energy resources, but to failings in their supply infrastructure. As serious as that may be, it’s the kind of problem that can be solved by throwing money at it. The electricity grid can be expanded to the source, more roads can be built, more train commandeered. As a previous commenter noted, rivers can be dredged and dredged again (although barges can’t float on a trickle). It’s hideously expensive, but we all know that China’s government isn’t shy about building huge infrastructure projects.

    The problem tomorrow will be a shortage of energy resources. As you noted there are a lot of places in China whose energy needs will grow dramatically as they develop. That’s something you can’t throw money at.

    What I find interesting is that everything I’ve read (not that I’ve read everything there is to read on this stuff, mind you) focuses on expanding capacity to meet demand as opposed to conservation in the face of limited supply.

    Conservation can be mandated by efficiency requirements or lower power consuming technologies or regulations governing usage. The last arrow in the quiver is pricing. As policies promulgated in the last few weeks show, China’s government is quite willing to set prices by fiat.

    My (completely shot-in-the-dark) guess would be that the government will blow a lot money in the near term on the supply infrastructure. Later on, when the problem is worse, they’ll come down heavy on the conservation side.

    I don’t think you’re overreacting at all. The events you’ve been talking about underscore just how precarious the energy situation in China has become. For all the power plants being built, the coal mines being dug, and the pipelines being laid, energy supply and demand are balanced on the head of a pin in China.

    All this will have both a direct and indirect effect on industry. Production and distribution costs will go up, reflecting higher energy costs for both production and transport and to mitigate the consequences of unreliable power distribution.

    The business environment will become more fluid, more unsure. When the government starts to do something about this, policies and programs, at both the national and provincial levels, will come fast and furious. Subsidies, incentives, taxes, and fees will be introduced, changed, shifted, or eliminated. Investment planning will become a nightmare.

    And, inevitably, China’s environment will get worse. More cars, more power plants, more coal mines, more dams, more roads, more dredged rivers. The land will be wrung dry for energy.

  7. Rich says:

    January 25th, 2008 at 3:12 am

    Thanks everyone. I have had several discussions offline with people in the energy industry, and the problem (as said by myself and others above) is not a matter of supply. It is getting the supply to the market.

    Before I address the comments individually, I would like to ask the following.

    What is the risk exposure to foreign firms?
    What can foreign firms (either manufacturing in China or sourcing from China) do to mitigate exposure to the problem?
    Are there any products that could enter the market?

    @JD – let’s just pray it is not as sudden as a bird hitting the window… I really don’t want to have to jog the 2km to the consulate and scramble over a wall.

    @ Duncan – sounds like you have an insider in play, and I had actually heard that there was a blip in the 3 gorges recently that reduced their production capacity (maybe Short term).. The negotiation you mention… domestic or overseas? Is China trying to reduce Aus/ NZ pricing?

    @ Levin – With all those constraints… where are the opportunities?

    @ Bandaaranike – interesting comments on the reservoirs. We have heard bits and pieces in the media, and silt was always a major concern for 3 gorges, but add the land slides and deforestation and it doesn’t take long to get the picture.

    Following up on your previous dredging comments. How many dredgers are needed to clean this up? Anyone really placed themselves as the dredging equipment company?

    @ Falen – a comment was made at the conference a couple days ago that basically we have yet to damage the earth enough yet for anyone to care. I guess it is jsut a question of what comes first, and if prosperity for everyone is possible given the fact we are using 3 earth’s worth of resources (According to Carbon Disclosure representative)

    @ Jim – I am sure the move to regional power supply is a good short term answer, but as I covered on Crossroads… even the central government says the current grid is a mess and needs an overhaul.

    With Worldwatch saying China will reach 18% renewable by 2015, how would China start bringing the dirty stuff offline? Where are the opportunities? Anyone in the lead already, or is it still anyone’s game?

    Oh – as shortages increase, it will drive prices up right. I guess, the question is how long will that take? Is it possible to transplant the growth of Beijing and Shanghai over 20 second tier cities and still find the materials at a reasonable cost?

  8. bandaranike says:

    January 25th, 2008 at 2:25 pm

    Hi Rich

    I am no dredging expert, but I will say very many new dredging units must be put in work if they want to use their hydropower stations and inland waterways in an efficient way during the dry season.

    High proportion of silt in Chinese rivers is a very old problem caused by the Chinese topography. Last 50 years has the siltation increased very quickly
    .
    All reservoirs is loosing its capacity of storing water due to erosion in the highland and the rivers transport sand and gravel in the river until it is hindered by a dam. After some years they are filled up, more or less.

    I would say that it isn’t a good idea to spend a huge amount of money to build great hydropowerstations if the reservoirs can’t supply the powerstation with enough water all the year to produce electricity in a high level.

    If they do nothing also the big Three Gorges reservoir will be filled up in 10-15 years. The bottom holes in the wall will only flush out sand from the reservoir close to the wall, the rest maintains in the reservoir.

  9. Rich says:

    January 25th, 2008 at 11:04 pm

    Bandaranike,

    Thanks again. interesting insights.

    Worst Case question for you. Is the biggest risk of topping at the 3 Gorges then from the fact that the pool will become more shallow?

  10. bandaranike says:

    January 26th, 2008 at 4:14 am

    Hi Rich

    The worst scenario is that 3G reservoir ends up like Gong zui, a 700 MW hydropower plant at DaDu River, a branch of Yangtze in Sichuan. The wall is about 800 m long and 68 m high. The reservoir has very low capacity; it is almost filled up with sand. You can practically walk from one side to the other on the sandy bottom in the dry season.
    Last year they took up a bottom hole in the wall (there was no one before!) to solve a major problem, they couldn’t open the dam locks because the sand stood high up at the dam wall. But the main problem low capacity to store water is unsolved until they are dredging the reservoir. But that is not an easy thing to do and there is many million tonnes of sand and gravel to bee removed

    The Gong zhui hydropower plat is very important electricity supplier to Chengdu.

  11. bandaranike says:

    January 26th, 2008 at 8:55 am

    Sorry
    I must correct this
    The dam wall is 550 meters, 200 -300 meters upstream it is about 800 m from shore to shore.
    The dam is 86 meters high.

    Gongzui hydropower station (downstream Dadu river), constructed in 1973, has a reservoir capacity of 350 Mm3 water. But till 1986 it has accumulated
    230 Mm3 of sediment and mud, causing a production loss of 50 MW. Also
    the water conserving ability of the forests is destructed, the 1981
    flood in Sichuan can be traced to the forest reduction. The flood
    disaster frequency in W Sichuan has risen from once in 15 years to
    once in 5 years. On the other hand,the February water flow minimum in
    Min river dropped to 1/42 of thelevel in the 30s.

    Source: /www.blasum.net/holger/wri/environ/china/for_sich.html

    This was written in 1996 much more m3 mud and sand has been accumulated in the last
    10 years

  12. Sin-Yaw Wang says:

    January 27th, 2008 at 3:56 pm

    China has more coals to sustain all its power needs. It does not have enough petroleum for all its transportation needs. The plan is quite simple: buy time with coals and gradually replace it with nuclear. As for petroleum, the market will kind of take care of itself. There are more electric bikes in China than anywhere in the world. I won’t be surprised to see more electric cars in a few years too.

  13. Sin-Yaw Wang says:

    January 27th, 2008 at 4:04 pm

    Also note that when China drive up material prices, it will be a world-wide phenomena, not just China. You will see copper, iron, petroleum, prices go up globally. Imagine the crude oil goes up to $200 a barrel. Yes, China will slow down then, but so will many other countries. The game is then, who slows down less.

  14. Rich says:

    January 27th, 2008 at 11:04 pm

    Sin-Yaw.

    Thanks for stopping in and adding to the conversation. Agree with the majority of what you say, but I would add that the reason for the “shortage” in petro is because the market is not controlled by the market. In fact, while China is an importer of petro, for the last 6 months it has been EXPORTING more than it has been importing.

    Hopefully the framework will stabilize to the point where the price control can be eased and the market can balance itself out.

    R

  15. Rich says:

    January 28th, 2008 at 4:54 am

    China’s Premier Wen Jiabao said 2008 may be “the most difficult year for the economy” because of global uncertainty and troubles at home, China National Radio reported on Monday.

    See Guardian report here

    China is finding it increasingly difficult to ensure supplies of coal, power and oil and to meet transport demand, a senior planning official said on Monday.

    Zhu Hongren, deputy head of the economic cooperation bureau of the National Development and Reform Commission, also said Beijing was finding it tough to meet its targets for saving energy and reducing pollution.

    Tough for China to ensure energy supplies -NDRC