Pearl River Delta

Wang Xiangwei – Updated on Jun 09, 2008 – SCMP

As the mainland focuses its attention and resources on providing disaster relief and planning the massive reconstruction effort in the aftermath of the deadly earthquake, another crisis looms on the horizon.

While last month’s disaster in Sichuan and the crippling snowstorms in February were natural disasters, the next one is likely to be man-made.

With the summer peak season for energy consumption upon us, the mainland is bracing for massive blackouts in major cities, serious disruptions of industrial production, long queues at petrol stations, and, possibly, frustrated drivers and others taking to the streets to protest at fuel shortages.

This is not alarmist talk. Worrying signs have already emerged nationwide. Officials have warned of an acute shortage of electricity during the summer as rising coal prices have forced many coal-fired power plants to stop operation.

The State Grid – the nation’s power distribution monopoly – warned last week of a shortage of 10 million kW this summer. Many provinces have inadequate coal stocks for power supply, with the reserves running below the crucial seven-day level in Hebei , Anhui , Hunan and Hainan provinces.

While there have been no reports of widespread blackouts yet, Guangdong has already suffered brownouts – dips in voltage – and factories in many cities have been forced to stop production because of the compulsory electricity rationing.

As oil prices soar, there has also been an extensive shortage of diesel across the mainland with petrol stations rationing supplies amid long queues of trucks. The need to ensure energy supplies in the quake-hit regions to support relief efforts and reconstruction has also further strained the situation.

In response, a clearly worried mainland leadership has been taking forceful measures to ensure energy supplies in the final stretch of its preparations for the Olympics in August.

The State Council has ordered coal-producing provinces to run at full capacity and even asked small mines, shut down for safety reasons, to resume production. It has also ordered the power companies to ensure a reliable supply “regardless of costs”, Xinhua reported yesterday.

Some provinces have taken more extreme measures by imposing price controls. Both Shandong and Shaanxi have ordered that the price of coal for power generation should not be raised until September, prompting concern that other provinces would follow suit soon.

Ironically, it is the administrative energy price controls that have led to the acute shortage of energy supplies every summer in the first place.

It is time that the leadership bites the bullet and undertakes much-needed energy reforms by ending the massive subsidies and liberalising energy prices. The mainland has liberalised coal prices but imposed price controls on electricity, which means that as the coal prices soar, the power firms suffer huge losses. In the first quarter, all mainland power firms reported losses with some already short of cash to buy coal.

Shandong and Shaanxi officials may believe they made a smart move by putting price controls on the price of coal but this would encourage coal producers, many of them privately owned, to produce less, which can further exacerbate the situation.

Mainland officials may have an easier time in controlling oil prices as both producers and refineries are mostly state owned. While China has become the world’s second largest consumer of oil and imports massive amounts each year, it imposes strict controls over oil prices by providing government subsidies and forcing refineries to sell finished products under the market price. As it stands now, the mainland’s domestic fuel prices are only about half of the international benchmark levels.

According to the latest research report from Morgan Stanley’s China economist Wang Qing, the total costs of the mainland’s implicit oil subsidies – including both direct financial support from the state budget and the losses incurred by the state-owned oil companies – could reach US$100 billion, or 2.2 per cent of national GDP, this year if global crude prices stay at US$130 per barrel and domestic refined product prices remain unchanged at their current levels.

The mainland may, for now, be able to afford its ridiculously low fuel prices for the sake of social stability because of its bulging state coffers. But such price distortions will have a detrimental effect on the quality of economic growth. First, the below-market prices of fuel have contributed to the explosive growth in car ownership, leading to endless traffic congestion and worsening air pollution in cities, to say nothing about energy consumption.

Second, by forcing power and oil companies to bleed losses, the government has removed the motivation and the opportunity of those companies to invest in future growth as the subsidies are not enough to cover the losses. This will sow the seeds for more trouble down the road.

In the past two weeks, several Asian economies, including Malaysia, India, Taiwan and Indonesia, have raised retail fuel prices despite strong domestic opposition.

What has prevented Beijing from following suit is its concern about the impact on the consumer price index, which stood at 8.5 per cent in April. But the increase in inflation has been mainly driven by food prices. However, food prices have already shown signs of easing.

If inflation begins its downtrend trend as expected in the coming months, the leadership should waste no time in gradually increasing the price of oil in the 10 per cent range each time as well as raising electricity prices.

Pollution threat to Olympics as factories shift to costly diesel

Denise Tsang – Updated on Jun 09, 2008 – SCMP

Coal supply disruptions intensified by China’s recent earthquake have brought forward scheduled peak-power rationing in industrialised Guangdong province and raised power costs, according to manufacturers.

In local production hubs such as Dongguan, a three-day-a-week compulsory rationing system began last month, about two months before a traditional scaling down of power supplies in July and August, some Hong Kong factory owners said.

The early introduction of rationing also came as the countdown to the Beijing Olympic Games, which starts on August 8, got under way against a background of mounting concerns that air pollution could jeopardise the event.

Manufacturers said the early start of the rationing system, had forced many factories to resort to costlier diesel-fuelled power generators, which they said increased electricity costs 10 per cent to 15 per cent.

Although the Guangdong provincial government warned of severe power shortages earlier this year, massive snowstorms in February and last month’s earthquake in Sichuan worsened the supply problem.

“The peak season power rationing was brought forward by two months in some parts of Dongguan and is spreading to other manufacturing towns,” Federation of Hong Kong Industries general committee member Jimmy Kwok Chun-wah said last week.

The magnitude 8 earthquake disrupted coal mining in Sichuan and Shanxi and delayed deliveries. The State Electricity Regulatory Commission revealed last week that five mainland provinces had less than the alarm-level seven-day stockpiles of coal.

Analysts blamed the situation on high coal prices and a two-year electricity tariff freeze, which they said had discouraged small miners from keeping normal levels of coal inventories.

“We now have no choice but to generate our own electricity, which is far more expensive,” Mr Kwok said. “This is a very unfortunate time for every manufacturer in China.”

To keep production on track, many factory owners have installed diesel-fired generators, which produce power at costs that are about up to 15 per cent higher than electricity supplied by power plants, he said.

Green Manufacturing Alliance chairman Sunny Chai Ngai-chiu warned that manufacturers should meet emission requirements when consuming diesel-fuelled electricity, as the Guangdong provincial government had tightened environmental controls.

“They should follow emission requirements even though their costs have increased,” Mr Chai said.

Mainland manufacturing costs, meanwhile, remained close to four-year highs, a monthly survey by CLSA showed. The CLSA index of input prices for May was 78.6, fractionally below March’s four-year peak.

“With demand exceeding supply for a wide range of commodities, average input prices faced by Chinese manufacturers continued to rise at a rapid rate in May,” CLSA said.