Energy & Resources

Blame shale?

Coal prices are on the slide in China

Blame shale?

Getting cheaper by the hour...

Many foreigners get exasperated by translators. Take Herbert Hoover, America’s 31st president. When he was working in China in his youth, Hoover nicknamed his own interpreter Really Damn. According to History Today this was because whenever bad news had to be delivered, the translator would say, “Hoover, sir, things are really damn”.

Hoover was a geologist by training and made his fortune from Chinese coal. In 1900 he set up a company to mine coalfields north of Kaiping (today’s Tangshan), persuading his partners “there was money to be made”. That turned out to be rather a lot – and more than enough to steer him on the road to the White House.

It has been a while since an American – or America itself – has had a similarly significant impact on China’s coal industry. But this may be about to change. Forbes is reporting that one of the dramatic side-effects of the boom in shale gas is that America’s power industry is relying much less on coal, from 42% of electricity last year to 37% today. And the upshot is that more American coal producers are looking for export customers. Last year the US sold 107 million tonnes of its coal abroad, double the amount it exported in 2006.

Not much of this goes to China currently (Australia and Indonesia provide the bulk of imports) but that could change in future too. An industry executive questioned by the 21CN Business Herald last month thought that US exports could reach 200 million tonnes globally this year, and that some of the increase would reach China, where it is being sold for Rmb600 per tonne, “more competitive than the price of domestic coal”.

The newspaper adds: “A report from the NDRC Energy Research Centre believes that if the US continues to increase global seaborne coal supply, this will become an important factor in making international coal prices decline substantially. Several industry insiders have predicted American coal exports to China may increase by more than 140% this year.”

Tan Xun, a sales manager with a Sichuan-based coal trader, added: “Once Chinese power plants are accustomed to using US coal, it will quickly dominate the market.”

At the same time as the surge in new options for supply, the Chinese economy has been experiencing a slowdown, meaning that demand for coal is slowing too. That has seen inventories piling up at the ports. For example, the coal stockpile at Qinhuangdao has reached 8.2 million tonnes (versus a capacity of 9 million tonnes).

The oversupply problem is being made worse by China’s own coal miners raising output. For example, in April national coal production hit 320 million tonnes, an increase of 6.7%. Shanxi province reckons its newly reorganised mines could add a further 100 million tonnes of capacity this year.

There is a beneficiary to all this turmoil: China’s electric utilities. From the early editions of WiC (see issue 3) we have described the battle between the power firms and coal miners over coal pricing. Increases in the cost of coal often saddled the utilities with losses, as electricity prices are fixed by the government, and can’t rise at the same pace.

But in a reversal of fortunes the power firms are now dictating the terms, as well as sitting on a record 27 days of coal inventory (96 million tonnes). A source at previously loss-making Guiguan Electric Power Corp says it is back in the black thanks to an 18% fall in its coal prices. And they continue to drop.

Securities Daily says this has also lifted the stock prices of listed electricity firms, with the industry’s first quarter profitability up 55% and brokerage analysts see the power utilities as one of the few ‘buys’ in an otherwise lacklustre market.

Of course, there are potential downsides to cheaper coal too, not least the environmental ones. Countries like China would have less incentive to develop alternative energy sources or to become more energy efficient (at least in immediate economic terms).

And that would mean more greenhouse gas – not what the champions of the shale revolution in the US promised at all.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.