Growth May Slow In Developing Economies

The number of reports of electricity shortages in China, India, and other developing economies recently, some of which I have posted, seem to be increasing.  Part of the problem in China may be due to environmental sensitivity surrounding the Olympics.  But it may also reflect a real shortage of coal globally and also the fact that electricity is becoming  uneconomical to produce given price controls on electricity combined with rising coal prices.

The last sentence of the report below from The Times  on an “electricity crisis in China”  says it all: “Analysts added that the coal shortages would skew their ability to forecast Chinese growth at a critical time for the global economy.”  It is possible that China and other developing Asian economies may face slower growth rates going forward as they run into several headwinds including:

1.  Limits on the growth in electrical capacity,

2.  Slower demand for their exports from OECD countries, and

3.  Environmental costs of high growth, especially in China.

From The Times

July 30, 2008

Coal shortage brings fear of electricity crisis in China

Leo Lewis, Asia Business Correspondent

China’s sprawling industrial heartland is braced for an electricity crisis as the closure of unsafe coalmines before the Olympic Games and the rising price of coal have left many power stations either without the fuel they need or unable to make a profit.

Energy experts believe that China’s coal shortage could trigger its worst spate of blackouts and brownouts in four years, hitting the metals and manufacturing sectors especially hard.

Coal generates 80 per cent of the country’s power and has been the predominant fuel of China’s economic boom. State energy authorities have given warning of long-term coal deficits at power plants in the world’s second-largest energy user. China, also the world’s biggest consumer of coal, could continue to face coal-related disruptions into the winter.

Transportation issues, typhoons and widespread pit closures have left many power stations without enough coal to fire their generators.

Across China, 51 power plant units have been closed because of the lack of coal, removing almost 3 per cent of national capacity and prompting electricity rationing in 14 provinces.

Yesterday, the State Grid Corporation of China said that 46 per cent of the stations connected to its grid had coal stockpiles below the official “caution line”, enough to last only seven days.

Central Government is expecting an overall power shortfall of about ten gigawatts over the summer, but the combined forecasts of the country’s individual provinces suggest that the real shortage could be more than three times as severe.

The underlying coal shortage is partly linked to China’s desire for the success of the Olympic Games. Coalmining in China has long been a notoriously dangerous business and the cause of about 4,000 deaths last year.

A drive to improve safety began months ago, but with the Olympic Games and international scrutiny looming, the Government is particularly keen to minimise the risk of a high-profile mining disaster occurring during August.

Dozens of pits, particularly in Shanxi province, have been closed because they have failed to pass more stringent safety regulations. Officials have promised stricter supervision in July and August, even for those pits that have met the new requirements. Other pits have been closed because of the cost of reducing pollution.

China has faced power shortages before but Andy Rothman, chief China economist at CLSA, said that the potential crisis this summer was different. Previously, China built power stations as demand outstripped the nation’s total generation capacity. This time, plants are shutting down because of a lack of coal and hugely inflated prices.

Runaway coal prices have shattered the business models of many power stations, quickly converting profit to loss because of government caps on what consumers pay for their power.

Thermal coal prices have risen by as much as 80 per cent since January. Beijing, meanwhile, allowed power tariffs to rise only 4.5 per cent in June - an increase shared between both the grid and the generators.

Commodities analysts are also factoring in the possibility that China’s status as a net exporter of coal could be on the point of reversal. As with other natural resources such as phosphorus, the Chinese Government is increasingly keen to keep more of its coal at home and may consider importing coal to protect domestic supplies.

Analysts added that the coal shortages would skew their ability to forecast Chinese growth at a critical time for the global economy.

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