China’s Coal Shortage is Exacerbated by Pricing Policy

Tuesday, August 5, 2008 1:39
Posted in category The Big Picture

Last week the new Energy Administration was launched, and it really could not have come at a more critical time.   China’s power producers have been short of coal for a while as rail capacity issues hampered their ability to deliver much needed reserves, and while the lights have stayed on for the last 6 months in Shanghai we are hearing about critical shortages in Guangdong and other areas.

reported on more frequently, these coal shortages are apparently are now a lot more complicated as China’s practice of setting price levels at the NDRC have created an arbitrage opportunity that coal mines cannot resist.  Exporting their coal to the world market.

[youtube width=”425″ height=”335″]http://www.youtube.com/watch?v=usB_jfgtlbQ[/youtube]

Where this story would be interesting to is in the details.  (1) Are we talking the same coal – thermal, coke, etc – being exported as is needed domestically (2) Are exports impacting deliveries to the hardest hit areas, or is this overstock that never couldn’t possibly be delivered anyway because the line from Shanxi to Guangdong is overcapacity anyway

this is a condition that  we saw in the petro market earlier this year, and it is interesting to see it occur in the coal market, but either way it shows that while Beijing may set prices there is a limit to these bands.. and that there are short and long term consequences to trying to defend a gap that is too wide without properly subsidizing firms.

To learn more about China’s Energy situation, you can see my previous posts here

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3 Responses to “China’s Coal Shortage is Exacerbated by Pricing Policy”

  1. Alex at InEmerging says:

    August 5th, 2008 at 3:42 am

    China has had a desperate coal shortage for several months now.

    The is an issue with supply but also with fake coal, unstable contracts, small mines and artificially low electricity (and coal) prices. The government has recently suggested power generators vertically merge with mines to help eliminate some of the problems, especially consistent supply and fake coal.

    Prices are fixed (ish) to June 19th levels (for each mine) preventing power companies making much larger losses but also restricting supply. Earlier this year coal exports were banned and some time ago taxes on coal importation relaxed. Many factories, esp. aluminium and other high users of electricity have been told to cease/limit operation.

    I am less familiar with coking coal, completely different market from thermal which I am involved with.

    Basically coal is coal with a bunch of different characteristics such as the calorie level, sulfur level, ash when burnt. Coke is generally better energy wise than thermal because of a lower water content, and much higher price. Coal from Shanxi may be 700 RMB for 5500 kal while Inner Mongolia may be 710 for 6000 kal (seemingly cheaper). The end product is a mix and each mine is subtly different in the mix but also (very importantly) the way it gets delivered to the buyer. It is not unusual for a buyer to ‘lose’ 10% of the shipment by the time it reaches their gates, often more. Better coal in Shanxi, Inner Mongolia and Heilongjiang than Sichuan and other Southern locations.

    There are still supply problems with diesel in many areas outside of larger cities.

    It’s a fascinating subject and I’d love to have a deeper conversation on it, feel free to email me.

  2. Rich says:

    August 6th, 2008 at 10:23 am

    Alex

    thanks for the comments. Part of what I am trying to understand as well is the different qualities of coal, what characteristics are most in demand here, and what the overall impact is given the recent pricing restrictions.

    Will be sending you an email soon.

    Hope all is well
    R

  3. The Green Leap Forward 绿跃进 » Blog Archive » Stanford’s David Victor on Coal says:

    November 16th, 2008 at 3:27 am

    […] price controls that seem to incent the export of coal for higher prices abroad, although as discussed previously, the MIT report finds that more and more […]