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China Is Playing With Fire As It Implements Price Controls On Coal

  • China’s state-owned power provider announced Sunday that power supply and demand in its service areas have returned to normal and rolling blackouts have decreased.
  • Thermal coal futures on the Zhengzhou Commodity Exchange have been halved in the last few weeks, allowing state energy firms to purchase coal at lower prices.
  • Even though SGCC is normalizing its grid, power to energy-intensive industries remains limited.

The largest Chinese Power Grid Company, State Grid Corporation of China (SGCC), announced Sunday that power supply and demand in its service areas have returned to normal and rolling blackouts have decreased, according to state news agency Xinhua.

SGCC's power grid reaches more than 1.1 billion people over 88% of China's territory. It said thermal coal inventories rebounded to 99.3 million tons, and the available days of inventory now stand at 20. Increasing inventories come as Beijing imposed price controls on coal. 

Just last month, when we reported that Beijing had imposed price controls on its coal prices, we said that the problem with such explicit measures which create an artificially low price is that they don't fundamentally address the underlying problem (too much demand, not enough supply), but instead accelerate panic hoarding and lead to a run on the artificially underpriced commodity. 

One recurring theme with central planning is that the greater the level of intervention, the worse and more widespread the unexpected adverse consequences. Beijing has been playing a giant game of "whack a mole" as it was directly responsible for soaring coal prices in September/October, telling state energy firms to "secure supplies [coal] at all costs," to only then impose price controls that sent prices tumbling by early November. 

Thermal coal futures on the Zhengzhou Commodity Exchange have been halved in the last few weeks, allowing state energy firms to purchase coal at lower prices, but panic hoarding could result in another push higher. 

Even though SGCC is normalizing its grid, power to energy-intensive industries remains limited. It warned the grid will suffer an "overall tight balance with partial gaps" this winter. 

China skipped out on last week's Cop26 UN climate summit in Glasgow as President Xi Jinping ramps up coal imports, coal power generation, and coal stockpiling. China Meteorological Administration recently warned a La Nina weather event would unleash a cold blast across the country. This has forced the country to increase fossil fuel power generation that has led to air quality deterioration. 

Mean temperatures in Beijing are below freezing this weekend as the capital experienced its first heavy snowfall of the season. Suburbs of Beijing saw the heaviest snowfall, up to 15.8 inches. 

As the colder weather rolls in, central planners have been on a multi-month frenzy to stockpile fuel and, as of last week, told households to stock up on food in case of emergencies, mainly because it expects food shortages as La Nina could trigger a winter of discontent. 

Interventions can only last so long as supplies are limited. Coal prices are likely to increase from here, and China's energy crunch to persist through the winter season. 

By Zerohedge.com 

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