China’s Coal Headache Continues – 12/5/16

China’s coal reforms are have its markets, miners, and power generators unsure what to do next.

Coal prices have spiked more than 60% in local-currency terms since the end of July after Beijing moved to limit production, according to analysis from Morgan Stanley.

While most economists agree that reducing excess capacity, particularly in state-owned enterprises (SOEs), is key to a more sustainable growth trajectory, China’s supply side reforms are receiving poor reviews.

Morgan Stanley’s Chief China Economist Robin Xing details two key ways in which supply-side reforms with Chinese characteristics have been ill-designed.

First, restricting the number of working days in the sector to 276 from 330 creates a misallocation of production that builds on the existing misallocation of credit favoring SOEs.

The second problem is the policy makes responding to demand spikes difficult, which made the recent rally in coal prices possible.

As a result of the demand spike, Beijing was forced to allow firms to meet the pick-up in demand and undercutting the intended reduction in capacity and emissions.

A similar problem appears in the Chinese power sector. A study from think tank Carbon Tracker Initiative indicates that over $490 billion will be spent building coal power plants made unnecessary by slowing power demand growth. The study echoed findings of an IEA study that also showed China may be investing too much in coal power despite government ambitions to scale back.

As of July, the country had 895 GW of operating coal capacity being utilized less than half the time, with another 205 GW under construction.

Additional coal capacity beyond existing plants is only required by 2020 if power generation growth exceeds 4% per year and coal plants are run at a utilization rate of 45% or less, Carbon Tracker said. Even existing capacity may come under financial pressure by 2020 from power market reforms and carbon pricing.

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