8   World Coal Bin Empty?

William Krehm

If you break up the sundry problems of a world economy into independent parts and mix them up as though they were a helter-skelter body of subprime mortgages, if you do not understand what those problems are and where they interrelate and run into each other, you haven’t a clue of what the real risks might be, or how to manage them.

Nothing better makes the point than the world coal crisis now coming at the rest of the world largely out of China. The Wall Street Journal (12/02, "China Spurs Coal-Price Surge" by Shai Oster in Beijing and Ann Davis in Houston) has this to say: "China is doing for coal what it once did for oil: pushing prices to new highs, adding more pressure to the creaking global economy.

"China has long been a huge supplier of coal to itself and the rest of the world. But in the first half of last year, it imported more than it exported for the first time, setting off a near doubling of coal prices throughout the world. The capper came in late January when a winter of punishing snowstorms and power shortages led Beijing to suspend coal exports for at least two months.

"Just since then, Asian prices have shot up another 34%. Last week, coal benchmarks hit all-time highs in the US, Europe and Asia. That’s added to worries over global inflation already stoked by prices rising for everything from crude oil to cattle feed. ‘The velocity of the change has been remarkable,’ says Thomas Hoffman, senior vice-president for external affairs for US-based coal supplier Consol Energy Inc., which he says is considering holding off on strong commitments to supply coal to see if prices rise even further.

"For the world which uses coal for about 40% of its electricity. the result is similar to what happened after China became a net importer of oil in 1993. But the Chinese factor is unfolding much faster with coal. It wasn’t until China’s industrial development shifted into overdrive this decade that that the nation began to shake global petroleum markets. Oil’s big surge came after widespread brownouts in China in 2004, forced factories there to buy diesel fuel for backup generators, increasing the country’s oil demand.

"China’s need for coal is rising as other factors around the world are putting severe strain on the supply of the fossil fuel. Flooding at major mines in Australia since mid-January has dramatically stunted that major coal exporter’s shipments to Asian markets. For more than a year, meanwhile, Australia’s overloaded ports have been choked with cargo vessels, forcing ships to wait in long lines to dock to get their coal. Power shortages and blackouts in South Africa amidst rising demand there have curtailed exports to Europe. In Russia, another major coal producer, railcar shortages have frustrated attempts to meet growing world demand. Japan, one of the world’s greatest importers, is burning even more coal since an earthquake damaged a nuclear reactor last year. Longest-term pressure comes from India, which has mounted a major expansion of coal-fired electricity plants that is driving up the country’s coal imports, despite its large domestic reserves. Indonesia has been moving this past year or so to divert more of its coal stores to domestic use, as the coal industry there has been depleting its higher quality coal reserves.

"Even US coal producers are ramping up coal exports to Europe as buyers who a few years ago had no interest in American coal are scrounging there for supply.

"‘There is a butterfly effect, with issues inside China pushing up demand and prices for the fuel from other producing nations,’ says Vic Svec, a senior executive Peabody Energy Corp., the world’s largest private-sector producer at St. Louis, Missouri. ‘Demand in Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming.’

"The China-driven coal-boom has pitch-ed up wages for US coal workers as well as for port and rail workers – a twist on the recent industrial jobs from the US to China. ‘We’ve never before as an industry seen such a dramatic upturn,’ said Bennett Hatfield, chief executive of International Coal Group Inc., another US coal producer. Thermal coal price of Australia’s coal at Newcastle port, finished at $125 a metric ton Monday, according to globalCOAL international trading platform. That was up 34% since 25 and up 143% from January 2007.

"On Monday Central Appalachian coal futures on the New York Mercantile Exchange for delivery in March stood at $75 per US ton. That’s double its price at the start of 2007 despite weak domestic demand and above-average stockpiles due to a mild US winter."

Growing Share

"Some experts say coal prices could remain high or even keep climbing through 2009 and beyond, weighing on the already slowing world economy. Even though coal is a leading source of atmospheric warming, greenhouse gases, its share of the world diet is increasing – which could help keep its world price up during a recession. Although the use of cleaner alternative burning fuels is increasing, fast-growing energy consumption is expected to increase. Still a relatively cheap – and relatively abundant alternative source of energy to oil, coal is sought in Brazil, India, and Vietnam as well as China.

"The demand for steel in developing countries is putting coal used for steel at historic highs, as well as the thermal coal used for power. New coal-fired electrical plants under construction in the US also should add 50 million tons of new coal demand a year; almost a 5% interest above the current demand, say natural resources portfolio managers at US Global Investors.

"To be sure, some of the factors boosting coal’s price are temporary. China’s worst snow storms in 50 years have both increased demand and hampered delivery from the mines of northern China to the power plants in the south of China and the western region. China has been methodically closing down thousands of unsafe and inefficient coal mines until enough new and refurbished mines can be opened. And China has freed domestic prices to rise with demand, but has capped electricity tariffs. This led to power plants ordering less coal leaving them short when the storms hit. [But] other factors are not likely to change soon.

"China’s demand grew 9% last year, raising China’s share to one quarter of the world’s consumption. Its coal industry rose from 2000 to 2006, but that growth slowed to about 6% last year. Five years ago China exported 83 million tons of coal more than it took in. Last year that surplus fell to 2 million tons. The rapid loss of 80 million metric tons to the world market amounts to about 12% of the traded international market.

"This year, predicts Gerard Burg, minerals and energy economist of the National Australia Bank, China will become a net importer of about 15 million tons."

Supply Worries

"Coal was assumed by many in the energy industry to be immune to worries about the stability of supply that had helped push oil to record heights. Coal reserves are more evenly distributed in the world, and it is consumed close to where it is mined. Coal prices enjoyed a bull run in 2004 and 2005, but today’s boom is bigger and is causing more concern.

"As recently as 2003, China was a critical coal supplier to Asian countries like Japan, which relies on China for 10% of its coal. But around that time China’s economic expansion began to accelerate sharply, especially in heavy industries that guzzle electricity including auto-making and chemicals. Coal exports began to dwindle and imports to rise.

"Beijing began to close coal mines in 2005 to address a horrific safety record. In addition China was adding hundreds of coal-fired power stations – enough to power all of Australia in 2006 and again in 2007. According to the China Electricity Council, China’s power-generating capacity rose by 18% just from last July to December, most of it fueled by coal.

"In northern China’s coal belt, there were massive expansions on key rail-lines to keep the supplies flowing. But by mid-December last year last year, cracks in the coal-supply chain started to appear. On December 11, the huge city of Chongquing announced it would ration electricity for the first time during the winter. Government officials said the overworked generators were breaking down, and there was a shortage of coal.

"By early January, the government said it had closed 10,412 coal mines and still planned to close 1,100 more. Coal prices, freed from government control two years earlier, were steadily rising. But the government was keeping caps on electricity rates to hold down inflation, at an 11-year high. Power producers began lobbying for high tariffs. They began shutting down some plants because they were unprofitable to run – and let their coal stockpiles run down to just 10 days supply, according to the Ministry of Railways.

"The worst blizzards in decades started to pummel an immense swath of central and southern China, leading to huge shortages. The vice-governor of one of China’s most economically important provinces, Guang-dong, publicly chastised power operators for chasing excessive profits."

Coal Shortage Hurts China’s Metal Output

"A day later, Xiao Peng, the vice-general manager of China’s Southern Power Grid, said the region had shut down 5% because of a shortage of coal – the worst electricity shortage in five years. Other provinces reported power plants had stopped reporting electricity because they could not afford coal supplies until ordered back on line. Later in the month came the ban on coal exports.

"The coal shortage has rippled through other markets, hurting China’s production of steel, copper. zinc, and aluminum, as electricity is being diverted to domestic industry and heat’ China’s largest copper producer, Jiangsi Copper Co., shut down some plants, contributing to high US copper futures. Jim Thompson, editor of Coal & Energy, a daily market news letter on the coal industry, said if global coal prices remain high, it’s possible that utilities could run low on fuel too."

What we had here could serve as a nightmarish synthesis of the mayhem of the Russian Five Year Plans of the 1930s, the Enron hyper-scandal in which three of them were involved one of them leaving much of its previous bailout moneys to settle out of court with the American government courts for having planned the off-the-corporation books scam that sent high Enron officials to long terms in prison; and the nightmare of an environmentalist. It certainly could not have happened without Globalization, and Deregulation, and of course the self-balancing-market dogma.

And as for the now deeply-tooled faith in central banks’ solving such a cluster of basic problems ("externalities") for most of which they haven’t had the time of day. Meanwhile there may be an unexpected revival of the newspaper business just to count transmutations of the subprime mortgage business to allow the banking system to complete its risk management by derivatives to which it was aspiring.

There is an emergency need for repossessing our history, especially what we learned as a result of the Great Depression, financing the Second World War, and during the first positive decades of the postwar. Our universities have been swept clean of that. It is time to deal with issues for which systems theory had promisingly been brought onto economists’ horizons. That would include Keynes, Kalecki, Douglas, and any thinker with a sign of a conscious and constructive curiosity. The very concept of "debt money" – the basis of the subprime mortgage in its endless echoes and mutations – is witness to that. What we need is a Royal Commission to set the enquiry on the right paths, and we need it soon. Why don’t some of the opposition parties pick this up to run with in the coming elections?

William Krehm

– from Economic Reform, March 2008