And We Think We Have Problems With Coal Prices?

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What a mess the Chinese domestic coal industry is in. Criticized for an appalling safety record the government has made admirable strides in recent years to close the small and most dangerous coal mines. From 1995 to 2008 the number of mines has fallen by 80% to 16,000 today and at the same time the death toll has fallen by 40% to (a still unbelievably high) 3786 per annum. Death rates are 8 times higher at small mines than large ones in China and the industry as a whole has a death rate 50 times higher than the next largest producer, the USA.

But these small mines produce some 38% of China’s coal, so as small plants have closed, coal production has slumped as demand has continued to rise. In a U-turn this year, the government is now encouraging local administrators to re-open small mines but the uptake has been very low as local officials’ fear they will be fired or worse jailed in the event of fatalities. As coal stocks have fallen, power cuts have been imposed this month in several provinces resulting in reductions in aluminum and zinc production which has pushed up prices on the futures exchanges.

But wait it gets worse. As the world thermal coal price has trebled in the last year, China’s coal mines have been capped and power generators have been allowed to increase their electricity prices by only 4.7%. You would think this would not be a problem for the generators if their coal costs were capped but the ruling only applies to miners not to coal traders and distributors down the line.  Though miners’ prices have stayed level, discouraging new mines or mining expansion, the middle men have taken advantage of higher export prices or sold coal on the domestic market to private companies not covered by the regulations, leading to dwindling supplies at power stations. Many coal producers are leaving coal in the ground in the expectation it will be worth more tomorrow than it is today.

If power distributors were allowed to charge a fair market price for electricity and in turn could pay coal miners a world market price for their coal, the shortages would be solved over night observers have said. But with inflation at a 12 year high that is unlikely to happen anytime soon.

–Stuart Burns

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