Brief Analysis: Coal in China and the Current Economic State

The year 2015, China saw a significant drop in the use of coal.  The same drops appeared in other energy sectors including oil and gas. A contributing factor to this decline is of course the current indolent economy China is experiencing due to overproduction and reduced demand for construction. Additionally, a shift in the central government has current administrators setting their sights on cleaner energy sources like wind, hydro, solar, and nuclear. As set forth in the Paris Agreement of 2015, President Xi Jinping promised seemingly remarkable reforms regarding China air pollution, guaranteeing a greener economy, and to hit peak CO2 emissions before 2030.

On the industrial side, demand exists for the construction of 210 new coal plants to be built across the country; the demand coming from provinces that have been hit hardest during this most recent economic decline.  There is large resistance within the government to these new plants, as these plants will make it more difficult to reach Xi Jinping ‘s 2030 objective. A fundamental shift in industrial infrastructure however, comes at a cost. Consideration must be made towards the millions of people who work and live in communities where existing coal plants and coal fired power plants operate, as these local economies are driven by the coal industry. There is a difficult balance between sustaining jobs in the energy sector while attempting to shift to newer cost and environmentally efficient forms of energy.

Due to this and other factors, it is safe to say that coal will not be replaced easily. Although current stats show that coal use has hit a peak (Figure 1), China is still the world’s largest consumer of coal.

The economy grew rapidly in China from 2002 – 2012. This was due to an exploding steel, cement and aluminium market. By the end of that decade, China was burning almost as much coal as the rest of the world combined. Half of this fuel was used in generating electricity, while the other half was used directly by the aforementioned industries. 2013/14 saw a leveling off of these numbers and by 2015, the coal consumption began its decline. The industrial sector ceased production rates it had enjoyed in previous years, and now faces the even larger threat of overcapacity. 2016 is projected to see a continuation of slowing growth, as the smoke stack industries and cement markets correct themselves. The move toward cleaner energy is inevitable, as construction of nuclear power plants, wind farms, solar panels and hydro-electric dams continue.

As china moves away from being reliant on heavy industry and into services, becoming more developed, electrical demands of future years could very well be met by hydro, nuclear, solar or wind energy sources. For now, stabilizing the marketplace and making the transition away from being a population heavily dependent on the coal infrastructure left over from the 2002-2012 boom seems to be the consensus.

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.