China’s Coking and Steaming Coal Consumption to Decline
As this article printed last week in the China Daily points out, 70% of China’s electricity is consumed by industry. Much of this electricity is generated through thermal combustion of steaming coal. A serious effort to signficantly curtail or close inefficient industrial production, such as the enforcement measures announced in September, may markedly affect electricity (thermal coal) and direct energy demand (e.g. coking coal).
According to the China Daily, Cinda Securities estimates a 2010 coal consumption reduction of 132 Mt relative to 2009, with a 6.7 Mt reduction in coking coal consumption. Reports already indicate that BHP Billiton has settled for reduced coking coal rates with Japanese clients, in the order of a 10% price reduction.
A reduction in demand would bring China’s domestic coal consumption back in line with aggregate coal production. China’s coal production relative to exports and consumption is assessed here.
The ambition is to reduce the contribution of fossil fuels to 85% of total energy mix in China by 2020, compared to 91% today.
An interesting comment in the China Daily article is that which describes the factory closure effort to reduce coal consumption as actually being a blunt instrument aimed at reducing GDP growth.
Increasing coal combustion is certainly a major contributor to environmental damage, which China’s Government recognises as reducing GDP. It is therefore ironic that reducing coal consumption should be nominally used to reduce GDP growth.
It is a signal that the central Government may not have been successful in supressing demand through controlling State-owned bank lending and property speculation. Instead, forcibly depressing steel production, much of which is used in building construction, is therefore an attempt to physically constrain aggregate output through means other than through conventional monetary and economic policy (e.g. rate increases by the PBOC).
From all angles it is apparent that coal will continue to be the energy of choice for continued Chinese development. It is likely that energy consumption reductions will be marginal rather than absolute, in that economic growth will outstrip energy efficiency gains.
In any event, aggregate reductions in consumption and demand in China are not readily anticipated by forecasters. Given the importance of China as a swing consumer, domestic policy developments such as these are interesting to consider.