China’s coal problem

From the International Business Times and Andy Lees at UBS:

Reports that central China’s Hubei province has joined a growing list of regions facing coal shortages with a warning that it is very likely to start power rationing later this month as coal supplies tighten and low rainfall reduces hydro capacity. China has warned that power shortages this summer could be the worst for years, with the east, the north and the south the worst hit areas but now adding central China to that group it sounds like the only region not affected is the west.

The State Grid Corp of China, the country’s main power grid operator says that there is now an even more serious shortage of inventory at the power plants than last winter. Rather than buying coal at high prices the power generators have been taking a wait and see approach. Coal consumption in the province of Henan, which was the main source of coal for Hubei, has also increased leaving less available for transfer out of the province.

China is reported to have increased power tariffs to help the generators but not sufficiently far to lift the margins noticeably. Clearly even if the margins are negative the government is likely to instruct the generators to produce power so it is just a question of where the losses or costs will lie.

The power shortage story is starting to become a familiar theme once again – (on Monday The Nepal Oil company said in the wake of the Libyan oil crisis it could no longer afford to import oil into Nepal from India such that the country was suffering acute fuel shortages). For the moment it is in the peripheral countries but how much longer before it starts hitting the marginal consumer in the developed world again?

It’s not just coal here. I have already mentioned the hydro power problem in China and China’s indirect resource grab. If China continues to grow at a fast pace, its energy resource problem will increase. How does it solve this problem: via better efficiency or slower growth? I would like to think that we can continue to see high global GDP growth without commodity prices rising. But, the reality is that countries like China which account for the lion’s share of global GDP growth are resource constrained. And this puts upward pressure on prices. Eventually we are going to see slower growth via demand destruction.

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