China Struggles to Control Coal Prices and Production

An analysis by Michael Lelyveld
2017-08-07
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An excavator moves coal onto a truck at a coal port in Lianyungang, eastern China's Jiangsu province, Jan. 19, 2016.
An excavator moves coal onto a truck at a coal port in Lianyungang, eastern China's Jiangsu province, Jan. 19, 2016.
AFP

Last September, a sudden surge in coal prices caught China's government by surprise, forcing it to boost production at a time when it had ordered the industry to cut back.

This year, China's economic planners have been surprised again as prices neared record levels in July, triggering more production despite government orders to close surplus mines.

The two episodes are the result of different circumstances, but they both point to policy problems and pollution concerns with China's heavy reliance on coal.

Last year, prices spiked when stockpiles at coal-fired power plants ran low before the start of the winter heating season after China's top planning agency pressured mines to move faster on cutting excess production capacity.

The short-term needs, sparked by growing demand for electricity and steel, clashed with the government's longer-term goal of curbing China's production overcapacity, which had depressed prices and profits for years.

Responding to the crisis, the National Development and Reform Commission (NDRC) authorized mines to increase output, in some cases at pits that had just been idled or closed.

According to data from the National Bureau of Statistics (NBS), coal production officially fell 9.4 percent in 2016. But production rose sharply from month to month throughout the year, while northern cities were smothered by clouds of coal-fired smog.

This year, coal prices and production have been on the rise once more, and the government claims that cuts in excess capacity are ahead of schedule again.

On July 17, Reuters reported that benchmark thermal coal prices briefly touched 614.6 yuan (U.S. $90.81) per metric ton, soaring far into the "red" zone established under an NDRC regulatory plan announced in January.

Under the plan, the agency has tried to keep prices within a "green" range of 500-570 yuan (U.S. $74.06-84.42) per ton, considered acceptable for most producers and industries.

In the "blue" range of 570-600 yuan (U.S. $84.42-88.87) or 470-500 yuan (U.S. $69.62-74.06), the NDRC enhances "market supervision" and offers "guiding measures," the official Xinhua news agency said.

In the red zone, the government can order "adjustment" of "abnormal prices" and production levels. The zone also applies to low prices under 470 yuan per ton.

With high prices and production adjustments, China's coal production rose 5 percent in the first half of this year, including monthly double-digit increases in May and June, according to the NBS.

Combination of factors

This year's coal squeeze is the result of a combination of factors including high economic growth rates and a 6.3-percent rise in first-half power consumption, driven in part by heat waves and air conditioning demand.

Alternating dry spells and floods have added to the problems of keeping coal-burning and prices under control.

Despite expectations that high water levels would lead to more hydropower and less coal consumption, the opposite has proved true.

Hydropower output was down 4.2 percent at midyear, while coal-fired generation was up 7.1 percent from a year before.

Philip Andrews-Speed, a China energy expert at National University of Singapore, said that cleaner hydropower has suffered from both drought and flooding so far this year.

"Drought lowered reservoir levels earlier this year, then heavy rains and floods led the government to order the dams to store the water to prevent exacerbating the flooding downstream," Andrews-Speed said by email.

In July, flooding forced cuts in generating capacity by as much as two-thirds at the Three Gorges and Gezhouba hydro plants to ease downstream pressure on the Yangtze River, Reuters reported.

As power demand increased, coal production rose 9.9 percent in April from a year earlier, 12.1 percent in May and 10.6 percent in June, the NBS said.

The increases threatened to break a string of reported annual declines in coal production and consumption, which have been hailed by environmental groups.

Sketchy data

While China has won praise for its progress on reducing coal use, the supporting data has been sketchy at best.

In March, the NBS said in its annual statistical communique that coal consumption dropped by a substantial 4.7 percent last year, without citing a tonnage figure.

The omission raised doubts, in part, because the China National Coal Association (CNCA) said consumption fell 1.3 percent from 2015, according to a Shanghai Daily report on Feb. 22.

The claims of reduced coal use have been hard to reconcile with last winter's increased outbreaks of smog.

In a rare update of consumption data, a National Energy Administration (NEA) official said that first-half coal use stood at 1.83 billion tons, accounting for 59.8 percent of total energy, Xinhua reported on July 22.

The official said the share was down by 0.6 percentage points from a year earlier but did not say whether coal consumption rose or fell.

The apparent reluctance to release complete and consistent data on coal consumption suggests that revisions may be in the works. The NBS has made major retroactive adjustments in the past.

The lack of consistent data poses a problem for climate researchers, since conclusions about greenhouse gas emissions may rely on China's official coal consumption reports.

But gaps in the data may also be causing problems for the coal market and regulatory efforts, which frequently seem blindsided by consumption conditions and demand growth.

Late reactions

While the causes of the price spikes last year and this year may differ, regulators appear to be in the dark until power plants complain about coal costs or supplies run low.

Regulatory reactions often come too late to avoid setting off a complicated chain of effects.

On July 19, for example, Reuters reported that at least six provinces had raised coal-fired power prices after the government cut surcharges for their environmental programs to help generators cover the higher coal costs. The cut left the provinces to fund the programs with their own rate hikes instead.

Partial data also appears to be a problem for the government's plans to reduce mining overcapacity.

The industry is believed to have so much excess capacity that it can meet the government's annual targets for cuts without affecting its ability to raise output as needed to meet sudden increases in demand.

That may be the case, but two years of price spikes in a row suggest that the NDRC cannot effectively manage the capacity cuts, production increases and prices at the same time.

Last year, the price crisis started after the agency complained that mines were moving too slowly on shutting down surplus capacity, spurring a rush of capacity cuts.

By the end of the year, the industry had eliminated 290 million tons of capacity, overshooting its annual target of 250 million tons. By then, coal prices had jumped by over 70 percent.

This year, the NDRC appears to be repeating the process.

Last month, the agency said the industry had achieved 74 percent of its 2017 target for cuts by midyear, eliminating 111 million tons of capacity. Shanghai Daily said the pace was "worsening the supply shortage to drive up the coal price sharply."

Effects of regulation


The effects of regulation are hard to assess, since the government does not disclose regular estimates of China's total coal production capacity.

In 2015, the official English-language China Daily cited a CNCA overcapacity estimate of 1.5 billion tons, including "around 4 billion tons" of existing capacity, 1.1 billion tons more under construction and annual imports.

According to past NDRC figures, China consumed 3.96 billion tons of coal in 2015.

If that estimate holds true, China may have used 3.77 billion tons last year, based on the NBS statement, while overcapacity could still exceed 1.2 billion tons.

Despite the annual cuts, the NDRC expects production capacity to rise by a net 200 million tons this year as increases at more "advanced" mines exceed shutdowns of outmoded facilities, Argus Media said.

But without better estimates, the NDRC may still be focused on managing short-term production levels while running the risk that overcapacity cuts will keep upsetting the market.

"If the government chooses to control coal prices by limiting production, then any sharp rise in prices will result in an order to raise production," said Andrews-Speed.

"In this case, rising demand for electricity and a temporary suspension of some hydro capacity has created the problem, but all sorts of other 'unexpected' events could trigger such a situation," he said.

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