China Caps Coal Prices

A price freeze on coal raises new questions.

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Coal-Worker-305.jpg A Chinese worker shovels coal at a mine plant in Hefei, in east China's Anhui province, Dec. 8, 2009.

By Michael Lelyveld

BOSTON—China has frozen its coal prices in the midst of surging power demand, sparking debate about the purpose of the government's policy.

On June 25, the National Development and Reform Commission (NDRC) told coal companies "to keep prices steady" and ordered producers to refund any increases above prices in their annual contracts, the Reuters news agency said.

The freeze comes despite soaring demand for coal-fired power due to a summer heat wave.

On July 7, the State Grid warned of temporary power shortages in key regions after consumption hit an all-time high, state media reported.

Ordinarily, a price cap would discourage coal production and only make power shortages worse. Economists say the government is acting contrary to market principles of supply and demand.

"It doesn't make sense in the basic way," said Derek Scissors, research fellow for Asia economic policy at the Heritage Foundation in Washington.

"When there's high demand for something, you want high prices to push people to consider alternatives."

Low prices only encourage consumption and put more pressure on supplies.

The results could be serious if power demand continues to grow with price caps in place.

Coal accounted for 90 percent of China's power generation in 2007, according to the Paris-based International Energy Agency.

The NDRC is fully aware of the problem after China suffered widespread power shortages in 2004-05.

During the crisis, the government kept electricity prices stable but allowed fuel to rise almost 50 percent, nearly bankrupting power companies.

This time, coal producers have taken the hit as their stock prices dropped sharply on news of the NDRC freeze.

Inflation 'the major concern'

In both cases, public complaints about inflation have been problems for the government.

"China's No. 1 concern is making sure that it manages its economy," said Taiya Smith, senior adviser at the United Nations Foundation.

"Anything that is seen as helping with inflation, they're going to immediately take a look at."

There seem to be plenty of signs that inflation is the government's major concern.

Authorities took strong action to discourage price rises after annual inflation hit 3.1 percent in May, exceeding the government's 3 percent target for the year.

On July 1, the NDRC punished corn traders in northeast Jilin province with stiff fines for "market manipulation" and announced two new offices to crack down on monopolistic behavior and price rumors.

On July 13, the agency threatened fines of up to 2 million yuan (U.S. $295,000) for spreading false information on prices.

The threat is likely to be used to keep prices in check.

While inflation is relatively mild, the government has been responding to a political problem.

In June, a People's Bank of China survey found that 58.9 percent of the public believe prices are "too high to be acceptable."

In June, inflation eased to 2.9 percent, keeping the index at 2.6 percent for the first half of the year, the National Bureau of Statistics (NBS) announced on July 15.

No rise in rates

The government has signaled it will not allow a rise in electricity rates. By curbing coal prices, it will keep power companies from suffering losses.

"They need to be able to ensure that power plants are able to continue making profits, and they keep their power plants operating on quite a slim profit margin," said Smith.

The coal freeze may also keep domestic supplies from rising higher than imports, Smith said.

In late June, Chinese coal was priced about 12 percent above coal from Australia, the industry newsletter Argus reported.

Despite production of some 3 billion tons, China became a net importer of coal last year.

But Derek Scissors is unconvinced that inflation fear is the reason for the price freeze. He notes that the major price pressure has come from the housing and property sectors, not fuel or power.

He also discounts the idea that public pressure over prices is driving the policy.

"They have complaints about inflation. They always have complaints about inflation," said Scissors.

"No one ever says, 'I wish prices were higher so I could pay more.'"

Instead, Scissors believes the squeeze on coal producers is the result of their slow response to the government's push for mergers of smaller mines to promote modernization and safety in the industry.

Mines still dangerous

Despite years of progress in reducing fatality rates, China's mines remain the most dangerous in the world.

After a string of recent deadly accidents, Premier Wen Jiabao took the extraordinary step of telling coal bosses to go underground and face the same risks as their miners.

"Enterprise leaders should work on-site shifts in rotation, while coal-mine and non-coal mine leaders should work shifts and descend into mine pits with workers," Wen told a State Council meeting on July 7, according to the official English-language China Daily.

Although the government's motives may be mixed, the price freeze may serve as a wake-up call to the coal industry.

"The central government has complained repeatedly about the disorderly nature of the coal sector, that there are too many companies, and they pop open these mines all the time and some of these mines are unsafe," Scissors said.

"If you make coal less profitable, you're going to drive some people out of business," he said.

If that is the idea behind the price freeze, it could mean a big cut in the number of mining operations, greater central government control over the sector, and perhaps a greater reliance on imports.

At the same time, the NDRC has shown concern that statistics bureaus have been submitting false inflation data, making it hard to set effective policies.

On July 7, the deputy director of the NDRC's Price Department, Zhou Wangjun, said some officials had used false figures from the Internet or previous reports.

"Those fake statistics affect policy making, and the government won't tolerate such behaviors," said Zhou, though it was unclear whether the NDRC considered the figures too low or too high.


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