URSABLOG: Total Power

One of the most disturbing things about totalitarianism is, well, that it’s total. China was one of the first countries in the world to commit to specific targets for carbon emission reductions, vowing to hit peak carbon in 2030, and carbon neutrality by 2060. This was very much a top-down edict, as the signs of achieving these targets look increasingly stretched as reality collides with policy. Following on from last week’s blog, which at times I admit was a little heated, some more interesting data has come my way. Leaving aside the conflicting views and consequential price fluctuations in energy, and the causes and consequences thereof, I stumbled across an interesting article by Alex Turnbull which sheds some light on what has been happening in the coal market in China itself.

In the second half of 2020 coal as a commodity in China was in trouble: inventories were high, and most of the supply of coal into southern China was coming from northern Chinese ports from supply inland, which squeezed other imports from Indonesia, as well as the politically troublesome Australian coal, some of which that has been sitting around ever since offshore waiting to be discharged. Mr Turnbull explains:

From early 2021 China started to draw its coal inventories down hard and deliveries from Northern Ports to Southern ports started to drop …. This might not be a big deal, but China’s power demand was flying at the time with electricity consumption up ~14% yoy in April-June and steel output up 21%.

So coal stockpiles were being reduced rapidly against a backdrop of very strong demand. Coal mining in China is heavily concentrated in the following provinces:

-?????????Shanxi

-?????????Inner Mongolia

-?????????Shaanxi

-?????????Xinjiang

For those that don’t have a map handy, this should help:

Coal is far away from where it is needed, and without Australian coal being in the mix for political reasons, and Mongolia (outer, I mean, the country outside of China, not the province within it) was not providing the usual level of supply ostensibly due to COVID, things started to get tight.

So what about the internal supplies? This is where the Chinese state, and the Party, comes in.

The party has a number of stated goals, which are commonplace and have been mentioned here before, but the ones on my mind right now are:

-?????????The climate targets above

-?????????The eradication of corruption big and small, tigers and flies

-?????????Self-sufficiency and a growing internal economy

-?????????Rebalancing the economy to avoid inequality and give the people without so much money a fighting chance

-?????????The party retains its dominance ad infinitum

?

So earlier this year, the coal stocks are running down, the demand for power is increasing as the economy powers itself out of COVID, and in the midst of all that anti-corruption measures are being enforced within the coal industry in Inner Mongolia. You may think this was ill-timed, but this was very much on President Xi’s mind. This is an article translated from Guancha, a state approved “new nationalist” media platform:

To learn history, to make sense, to increase credibility, to respect morals, and to practice, the source of everything is for the people. Towards the end of the deliberations, General Secretary Xi Jinping made a heartfelt remark:

"In the past two days, I have seen a report from the Inner Mongolia Autonomous Region Committee of the Communist Party of China to the Party Central Committee, which is the ‘Report on the Special Rectification of Illegal Issues in the Field of Coal Resources.’ Inner Mongolia is a very important area of anti-corruption, in particular in the coal Realm. To be an official of the Communist Party, to be a public servant of the people, and use national resources to engage in bribery, to engage in power and money transactions, this is calculated and deliberate."

This is Google translated and further mangled by me, so there maybe something lost here, but I hope you get the gist. If you are reminded of old Pravda press releases and some of the more chilling moments of Animal Farm then you are of the same vintage as me. If not, then start reading George Orwell and quickly, fiction and non-fiction. It may prove vital.

Anyway, the basic facts are that 30 million tonnes of domestic production have been lost so far this year in China, and another 12 million tonnes of imports has been missing from Mongolia. This is before the winter starts, and already power cuts and restrictions stalk the land. The reports of coal that has been sitting in ships stranded off the coast of China for the last few months or longer now being quietly unloaded seem hard to verify, especially as there are other reports saying that India is taking the coal off these ships at a discount rate to alleviate their own power shortages.

So it is no wonder that China has now ordered a boost to production of its own coal mines as industrial production growth is being badly affected by power cuts, and this is filtering down to households too. I was reminded how productivity can be severely affected when our own office here suffered a black-out for many hours earlier this week, although the cause of that was rather more mundane than a lack of power. China needs to keep growth going, and the people happy. For now climate goals, and tigers and flies for that matter, are less of a priority than getting enough energy to drive the generators to drive the country and keep everybody happy.

This means of course higher coal prices – and stronger tonne mile demand for us in shipping – and a reminder that the road to decarbonisation is not smooth for anyone, even a totalitarian regime. We had better get used to higher energy costs, and soon, because this will be a feature of cleaner energy. There is no magical low-cost alternative to the low-cost reality that exists now. And freight rates, however high they get, are such a small proportion of the total value of the cargo itself that a 100% increase in shipping costs would do nothing to dent the demand for energy, whether coal or gas. The tanker sector knows this all too well of course, only that now, sadly, things are in reverse.

The other problem with totalitarianism is that it is opaque and ultimately inefficient. If the dry bulk freight market is benefitting from the clumsy moves of an unwieldy and hungry policy machine, where making a wrong move means punishment of one sort or another for the decision maker, then it is no wonder that the markets do not run smoothly

Trade wars and diplomatic issues are ultimately harmful to the economies that start them and escalate them, and I suspect in the long term, and by this I mean years rather than months, growth will be increasingly affected as ever greater obstacles to trade are erected. In the meantime the demand for energy is just one other reason that the dry bulk market is a gift that cannot stop giving, at least whilst those in power, in China in particular, realise that taking it away would also take away the reason for their own existence. It is very difficult to live in today’s world without electricity and as we also live in a world of scarce resources, some of them scarcer than we would like, then someone has to pay. At the moment I suspect that the beneficiaries of that demand will be coal exporters, and by derivation, ship owners. Nonetheless it is an ill-wind that blows nobody any good, and dry bulk shipping has many reasons to be grateful. We should not forget however that these winds can change direction very quickly too, and we should be prepared for as an abrupt change of course as General Secretary Xi has made in recent weeks. But at least total power means never having to say you’re sorry. For now, at least.

Simon Ward

www.ursashipbrokers.gr