From Asia Times:
China, the world’s largest coal producer, is stuck between a rock and a hard place with shortages of the fuel exacerbated by the government’s aggressive goal to cut excess capacity.
The China National Coal Association predicted at its third quarter review forum on Tuesday that periods of supply shortages will likely occur across the northeast, southwest, and central regions due to a fall in hydroelectric power generation, inadequate coal stocks across the nation, and a congested railway network.
Insiders says that the National Development and Reform Commission (NDRC), the country’s national planning agency, is trying to address the supply and demand imbalance.
It has summoned senior managers from China Shenhua, China Coal, Shanxi Coking Coal and 22 other large producers to come up with a solution to the supply shortage across several regions.
The commission has requested accelerated production in the more advanced mines and asked the sector to ensure an orderly expansion of supply to stabilize surging market prices.
However, coal companies are reportedly reluctant to increase output as a majority of the country’s mines are still losing money and it will take time to recoup losses incurred in recent years.
China has seen output in the first three quarters fall 10% year on year despite a recovery in demand since July, as highlighted by the NDRC.
This has resulted in a surge in coal prices, as witnessed at the major coal hub of Qinhuangdao where they have risen 56% since the start of the year.
Analysts expect the arrival of winter to further push up coal prices as supplies remain relatively tight despite the central government’s efforts to boost production.
The NDRC said on Tuesday that the removal of excess capacity in the coal industry has already exceeded 80% of this year’s target.
As far as I can see, China’s coal policy is perfectly insane. It has:
- created for itself a terms of trade shock;
- that is rapidly morphing into an inflation shock, and
- driven seaborne prices wild such that an external supply response is inevitable, substituting more efficient Chinese mines with less efficient elsewhere.
And that’s just thermal coal. The situation in coking coal is even more bizarre. There is no great oversupply of coking coal and China does not have that much of it anyway. The best stuff is quite tightly held in Australia so China has basically just handed Straya free money for no discernible reason (bring it on!).
I’m sure that China has in mind supply side reform to eliminate over-production and increase productivity, as well as take international pressure off its dumping steel sector.
But all it has actually done is destroy steel margins globally as coking coal goes nuts, and because its policy implementation is to limit the number of coal mining days, it has closed efficient as well costly mines, wrecking productivity.
This debacle is starting to resemble the stock market bubble that was then reversed, the bond market bubble that was then reversed and the housing bubble that is now being reversed. All have been policies designed to support the glide slope to lower growth but have instead scattered economic well-being in their wake.
How long before China reverses its crazy coal blunder I ask ya?
