[R-G] China: Friction over Coal Price at Root of Power Shortage

[Yoshie Furuhashi]

<http://www.ft.com/cms/s/0/429c382e-ced6-11dc-877a-000077b07658.html>
Friction over coal price at root of power shortage

By Richard McGregor in Beijing

Published: January 30 2008 02:00 | Last updated: January 30 2008 02:00

The unusually heavy snowfalls in the past week have not helped, but at
the heart of the power problems in about half of China's regions is
coal, the economy's staple fuel.

The snow has complicated the already challenging logistics of getting
coal to a power system that has grown at exponential rates in the past
two years, adding generating capacity equal to the entire grid of the
UK in both 2006 and 2007.

But the snow is a transitory problem.

In the longer term, the rolling cuts are the product of a clash
between the power and coal industries over price and profits, with
Beijing standing by, sometimes ineffectively, as referee.

The state power companies have bristled in recent years at the rising
cost of the coal they buy to fire their generators. While coal prices
have been largely deregulated, and become increasingly tied to global
markets, power prices are still set by the government.

Added to this already volatile mix are two other issues: inflation,
which hit an 11-year high in November; and a rise in global coal
prices due to the flooding

of mines in Australia and supply problems in South Africa.

Beijing has ordered price controls in recent months, including on
power, in an effort to ensure that inflation, now confined largely to
food, does not spread to the rest of the economy.

Global coal prices, in the meantime, have soared in recent months, by
50-60 per cent, with the largest rise occurring in recent weeks
because of the Australian floods.

"There is a large amount of coal traded internationally which is
suddenly no longer available," said Jim Brock, a Beijing-based energy
consultant.

Against this background, power companies have been refusing to pay the
prices they negotiated with the coal companies earlier this year. And
the longer the delay in honouring these contracts, the higher the
asking price for coal.

As a result, many generators are short of coal, or had their power
inventory cut to about four days, dangerously below the Chinese
industry standard of two weeks to 20 days.

Beijing has now ordered coal companies to stop haggling over price and
deliver the coal, which they are struggling to do via the country's
snow-clogged transport system.

But Beijing appears equally furious at the brinkmanship of the power
companies. Mr Brock said: "I think the power companies' tactics have
backfired."

--
Yoshie
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