Smokestack Industries in China Face Serious Problems
/Gansu, Northern China
Due to overcapacity and slowing demand throughout China’s core building materials industries, regulators have been under pressure to cut power prices. Bloomberg News reports that in some regions, the rates were expected to decrease by 0.03 yuan per kilowatt-hour. This small reduction represents significant savings to aluminum, cement and steel-manufacturing companies, whose power usage represents over 40% of production costs.
Regulators assert this reduction comes at a justifiable time, since coal prices have also decreased significantly over the past year. This reform could potentially help relieve stress from some crucial industries and keep some doors from closing. The move has already been made in Gansu province, whose state-owned Liancheng smelter is currently receiving decreased power prices.
What appears to be a welcomed relief to smokestack industries may also have dire repercussions. Due to overcapacity, companies are attempting to pass their savings on to the buyers by lowering aluminum prices. The reduction will bring down aluminum prices to a six-year low at just under 8,900 yuan per ton. The fear now is that this new policy will undermine current energy/environmental policies that encourage energy conservation.
Aluminum, steel and cement are the most power hungry industries in China and therefore are the main users of high polluting coal; the cause of the country’s CO2 emissions and air/water pollution. China has been discouraging the expansion of these industries as far back as 2004 with power pricing differentiation. These did little to dissuade investment from these industries. Since the four trillion yuan stimulus program of 2009, China’s smelters are operating at a loss. Ninety percent of aluminum smelters have excess inventory and are unable to support their current capacity. Cement and steel industries are at similar annual losses; production for cement dropped 4.6% while crude steel dropped 2.2% (The National Bureau of Statistics).
A combination of regulatory, market and environmental policy reformation is necessary to address this issue. Even with a lack of carbon tax, a surplus of coal and industrial overcapacity, the power price cuts seem likely to continue.
