China May Stall on Steel And Coal Plans

An analysis by Michael Lelyveld
2016-05-09
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Chinese workers move a bundle of reinforcing steel rods at a steel product market in Yichang, central China's Hubei province, Jan. 3, 2016.
Chinese workers move a bundle of reinforcing steel rods at a steel product market in Yichang, central China's Hubei province, Jan. 3, 2016.
ImagineChina

China's environmental policies face a critical test as economic pressures challenge efforts to reduce reliance on coal.

In a series of announcements since March, the central government has pledged to close thousands of mines, cut operating hours and curb production capacity, which exceeds annual output by nearly 2 billion metric tons.

Coal production and consumption have both dropped for two years in a row as demand slides along with slower economic growth.

The trend has extended into this year's first quarter as production dipped 5.3 percent to 811 million tons and consumption slid 3.7 percent from a year earlier to 910 million tons, the National Bureau of Statistics (NBS) and the China National Coal Association (CNCA) said.

But other first-quarter figures suggest that coal producers may be tempted to delay cutbacks as short-term price gains combine with efforts to avert an economic decline.

Similar forces have already been felt in the coal-fired steel industry, which recorded its first production increase since 2014 in March. Steel mills have been rushing to cash in on an uptick in prices, despite massive production overcapacity and government orders to make cuts.

China's cabinet-level State Council has told steelmakers to shed 100 million to 150 million tons of capacity over the next five years, eliminating up to a third of the excess that has been blamed for low prices and losses around the world.

Short-term price spikes

But Credit Suisse analyst Vincent Chan told Barrons.com that some manufacturers have backtracked to take advantage of short-term price spikes.

"Real capacity closure and temporary suspension should be discriminated. The former hasn't really happened," Chan said.

"With improved conditions like steel price recovery, these capacities can come back into (the) market fast. In fact, 160 million tons of capacity have already revived or will be revived in Tangshan (northeastern Hebei province)," he said.

In April, the purchasing managers' index (PMI) for the iron and steel sector rose for the fifth month in a row to a reading of 57.3, the China Federation of Logistics & Purchasing reported.

PMI readings above 50 signify expansion. April marked the first month in two years that the index exceeded 50, the official Xinhua news agency said.

"Encouraged by the upward pricing trend, many steel mills are resuming production," Xinhua reported on May 3, noting plans to restart mills in other steel centers, including Tianjin and Shanxi.

Steel product prices have climbed by over 60 percent this year, the report said.

But the sudden turnaround for the industry has clashed with the government's plan to make cuts.

Last week, the Ministry of Environmental Protection cited steelmakers in Tangshan for "illegally expanding ferroalloy production capacity" and defying government orders to downsize, Reuters reported.

Coal prices up

The same pressures may come to bear in the coal industry, where modest price hikes have slightly eased the multiyear slump.

Benchmark domestic coal prices rose 5.4 percent this year by mid-April, although they remained nearly 20 percent below year-earlier levels, Reuters said.

With the improvement in prices, China's coal imports also showed signs of life in March, rising 15.6 percent year-on- year, according to customs figures, although quarterly imports fell 1.2 percent.

The increase temporarily firmed coal prices on Asian markets and raised hopes in supplier countries like Australia for a bottoming out after a nearly 30-percent plunge in China's imports last year.

In April, coal imports cooled down again, falling 4.5 percent from March and 5.8 percent from a year before, Platts energy news reported.

At least two major factors seem to be at work in both coal and steel.

The first is that survivors of the shutdowns have been able to benefit from a tightening of the market by staying open longer, at least in the short term.

The second is that the government's attempts to stem the economic slide with stimulus policies may be helping to rally demand, encouraging failing coal mines to prolong operations.

"I think it's a real risk," said Kristen McDonald, China program director at Pacific Environment, a San Francisco-based nongovernmental organization.

"That's why folks in the environmental movement are trying to seize the opportunity at hand to see if there's a way to ensure that doesn't happen," McDonald said in a phone interview.

china-coal-yard-jiangsu-province-feb2-2016-400.jpg
A Chinese worker levels coal at a coal yard in Jinhu county, east China's Jiangsu province, Feb. 2, 2016. Credit: ImagineChina
Reversal of decline

First-quarter data suggest that economic rescue efforts have slowed or reversed last year's decline in key growth sectors like property development.

Gross domestic product growth fell to 6.7 percent during the quarter, but new home prices rose in 62 of 70 surveyed cities in March from a month earlier, up from 47 in February, the NBS reported.

Quarterly property investment climbed 6.1 percent from a year earlier after 1 percent growth for all of 2015.

The renewed activity followed a 25-percent jump in yuan-denominated bank lending in the first quarter, threatening a return to previously shunned stimulus policies.

Signs of a turnaround were also seen in energy use as power consumption increased 5.6 percent in March and 3.2 percent in the quarter, up from 0.5 percent last year.

The revival may be fleeting but it seems bound to have an effect on China's coal consumption, which has been cited as the world's leading source of energy-related carbon emissions and smog.

Even after two years of declines, China burned 3.97 billion metric tons of coal in 2015, according to CNCA data.

A report to the National People's Congress last month found that only 73 of 338 surveyed cities met China's own national air quality standards, Xinhua said.

In what could be a major step for environmental protection, China's National Development and Reform Commission (NDRC) planning agency announced on April 25 that 15 provinces and regions with surplus generating capacity should ban or delay construction of new coal-fired power plants until 2018.

The rule could cut overcapacity and limit incentives to burn cheap coal by heading off some 200 planned power projects, according to Greenpeace East Asia.

Enforcement unclear

But it is unclear how strictly it will be enforced, or whether it is really a rule at all.

The New York Times called the announcement a "guideline," making it uncertain that the central government has reversed its 2013 decision to transfer power over project approvals to provincial authorities.

The shift, which was meant to ease bureaucratic burdens, led to overbuilding and competition for GDP-boosting power projects, particularly in coal-reliant regions, Greenpeace said in a study last November.

Although power plants are running at 50 percent of capacity or less, the incentives for building new coal-fired projects remain, said Lauri Myllyvirta, Greenpeace senior global campaigner.

"With every power plant being given roughly the same amount of operating hours, building more still grows your market share and revenue at the expense of others," said Myllyvirta, as quoted by cleantechnica.com.

First-quarter figures show thermal generating capacity rising at a 9.3-percent rate, nearly three times faster than consumption growth. Thermal, mainly coal, power still accounts for 67.5 percent of China's total generating capacity despite big gains in wind power.

The NDRC guideline may cause provinces to reduce or reconsider new power projects, but it may do little to resolve conflicts between environmental and economic growth goals.

"I think everybody's well aware that there is a risk, and there are certainly powerful forces ... in China that do hope the economy turns around and leads to reintegration of the coal industry," McDonald said.

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