The Central Government’s Fifth Plenum Is Likely to Dwell Extensively on Energy Policy
China’s leaders know the country’s overreliance on coal undermines its long-term economic viability, so energy policy will be a topic of deep discourse as the China Fifth Plenum unfolds this week in Hong Kong.
The Fifth Plenum is one in a series of seven events at which the communist leadership every so often plots out the upcoming five-year economic course of the most-populated nation in the world (here’s a quick primer).
China is as its leadership does. Policy matters because the economy is so centralized, run by a strong hand in Beijing, where planning is no joke.
Fresh data out today will inform this week’s policy-course discussions, where, as AFP notes over the weekend, “economic malaise and the specter of intractable pollution” are at the top of the agenda.
The government has published revealing new details on China’s electricity-market activity, including six points that stand out in particular:
- China electricity consumption year to date (YTD) appears to be up +0.9 percent year over year (yoy) at 4,126 Bn TWh.
- China’s thermal plant utilization rates fell 265 hours, or 7.5 percent yoy and have a current utilization rate of 49.5 percent utilization rate this year from January through September.
- China’s total raw coal production so far this year is down 4.3 percent yoy, while coal imports are down 29.8 percent yoy, and China overall coal use is down 5.7 percent this year.
Year-to-September 2015 China electricity-market trends indicate a shift away from coal-fired generation; a few details and impressions of note from this particular government data:
- China’s thermal plant utilization rates fell 265 hours or 7.5 percent yoy. This yields a 49.5 percent utilization this year through September 2015 (versus 53.7 percent in calendar year 2014 and 57.3 percent in 2013).
- China is reported to have added 60 gigawatts of new thermal power generation capacity in the 12 months to September 2015, almost equal to the combined 58 new gigawatts of nuclear, hydro and wind. Coal’s challenge is that it ranks last in the merit order, hence the collapsing utilization rates.
- China ongoing construction of new coal plants, given the collapsing coal-fired demand profile, is confounding in the sense that these are stranded assets the day they are commissioned.
- China’s year-to-September thermal power coal production was down 4.3 percent yoy to 2.73bn tonnes, while coal imports are down 29.8 percent yoy to 0.16bn tonnes. Overall, Chinese coal use is down 5.7 percent year over year.
China’s state-owned Shenhua Energy Group, aka Shenhua, has just reported its year to September 2015 results that speak volumes:
- Shenhua reported year to September sales down 31 percent yoy to Rmb131bn.
- Shenhua reported own coal production YTD down 10 percent yoy to 210.6Mt.
- Shenhua reported total coal sales YTD down 18 percent yoy to 278.9Mt.
- Shenhua’s coal imports are down 98 percent yoy to 0.1Mt.
- Coal production costs (including depreciation) fell 9.5 percent yoy to Rm116/t versus an average selling price of Rmb302/t (down 14 percent yoy) because of deep Chinese government cuts in coal taxes and royalties (down 21 percent yoy), driving most of the lower cost of production.
- Shenhua’s coal mining division reported gross profit margins down 220bps yoy, but still materially positive at 13.8 percent in YTD 2015.
- Shenhua reported total coal-fired electricity generation YTD down 4.2 percent yoy to 143bn TWh. Shenhua’s realized wholesale electricity prices in China were down 5.9 percent yoy to Rmb337/MWh (US$53/MWh)—passing on the benefit of lower coal prices to consumers.
- Shenhua took a Rm563m (US$88m) writedown on closure of its Beijing coal-fired power plant.
- Construction in progress across the company dropped 48 percent yoy.
- Shenhua reported net profit down 42 percent yoy to Rmb18bn.
- The company made no mention of its proposed Watermark project in Australia, a tacit acknowledgement of the collapse in Chinese demand for coal imports.
China is the biggest coal consumer in the world, true. And it’s reconsidering, as we speak, whether its strong taste for coal is in its best interest.
Tim Buckley is IEEFA’s director of energy finance studies, Australasia.