China’s Energy Consumption Data: The Canary in the Coal-Fired Economy?
It seems to us that voices warning of China’s economic slowdown are multiplying and growing louder. In the beginning, there were a few lone China short-funds run by contrarians like Jim Chanos and Hugh Hendry (nice video of chinese ghost towns from 2009). In 2011 these hedge funds hit pay dirt, making big gains by profiting from short-selling stocks with China slowdown exposure.
Now, it is understood that China’s economy is slowing as the Government attempts to bring the massive property bubble to a soft landing. (Some say it’s the biggest, fastest property bubble in global economic history). The Central Bank is relaxing the reserve ratios for banks to ease lending. Most recent property data (Governmental) is horrible: no cities in China have experienced property price rises in the last set of data – most have seen declines. Property accounts for 13% of the Chinese economy. Inflation is rising, reducing the Government’s wriggle room.
No serious analyst uses official Chinese economic data without a pinch of salt. Instead, for years, those seeking to really understand what happens in the Chinese economy have also looked closely at energy generation and consumption as a closely aligned indicator of economic activity. Even then, industrial energy management specialists we know who have worked in China for years have learned to be very sceptical of reported consumption data: reality isn’t always reflected.
China is the largest coal consumer in the world, and the scale of installed capacity additions of coal-fired power stations is staggering. This growth has impacted world commodity markets, global greenhouse gas emissions growth, and local air pollution alike.
Latest data from the China Electricity Council shows that power consumption in January fell by a massive 7.5% from the previous year, as reported by CapitalVue.
Ouch. That’s a really big fall which is somewhat hidden in annualised data.
There are potentially plausible reasons provided for this change. The Council still expects consumption to pick up throughout the year to a 9.5% growth rate in 2012. Perhaps it’s an aberration.
China Daily, quoting the China Electricity Council, also points to a slowdown in electricity consumption growth in 2012 but also a massive impending shortfall in coal production in meeting increased demand.
A Bloomberg article today has a different perspective. They maintain that energy consumption, and production, continue apace – yet coal imports (responsible for most electricity production domestically) will decline by 40 million tonnes (steaming coal) in 2012 – apparently due to a massive enhancement in domestic coal production capacity – according to the Government’s National Energy Administration.
Wait: which is it? Will increased demand be met by domestic production, or will it not thereby requiring additional imports? If domestic production can’t meet demand, then why will there be a reduction in imports?
This can’t just be a case of not comparing apples with apples.
The difference can’t be explained by the balance being coking coal: who could imagine a massive uptick in coking (rather than steaming) coal production to meet power demand?
China’s property sector is expected to be the largest driver for steel (for which much coking coal is used). Reuters points to an uptick in daily production in early February – but not much considering the country shuts down for New Year celebrations at the end of January. The report points to a slowdown in construction ‘over winter’ and ‘hope’ that demand will pick up. Why would demand pick up in a depressed property market (other than through a vast social housing investment program currently being run by the Central Government)? Was the slowdown due to bad weather, or the depressed state of the property and construction market?
Will continued issuance of non-performing loans to construction companies by banks and municipal investment vehicles, alongside Central Government property spending, be sufficient to be reflected in energy demand data in coming months?
Keeping a close eye on that energy data in the near future will be a useful exercise.