Winter weather and rising heating demand in northeastern China are expected to keep coal prices high and industrial costs rising, an inflationary combination that threatens to weigh on economic growth.
A State Council order to local governments in northeastern China to ensure the supply of heat to local residents has stabilized what could have become an emergency situation. It’s come at a cost, though: residents in the region have complained they now must pay as much as 50% more for heat as suppliers pass through higher coal prices to their power rates.
At the same time, China’s recent decision to remove electricity price caps for energy-intensive industries will make aluminum and chemical makers pay more for electricity and thus cause many to cut production to avoid losses.
Inflationary pressures are building across the economy. China’s producer price index (PPI), a measure of raw material costs that grew by 10.7% year-on-year in September, is now at its highest level since 2006. The PPI was up 9.5% in August and 9% in July, according to the National Bureau of Statistics (NBS) due to rising prices for coal, steel and chemicals.
Bloomberg reported that both input and output prices for manufacturers jumped, suggesting producers are passing on higher costs to customers. It reported in mid-October that China’s factory-gate prices grew at the fastest pace in almost 26 years in September.
Coal mining, chemical raw material production and product manufacturing, as well as ferrous metal smelting and processing, have driven the PPI’s rise. Economists and analysts suggest that uptrend could be sustained in the months ahead as fuel demand rises to heat homes in the winter season.
Meanwhile, the official manufacturing purchasing managers’ index fell to 49.2, the NBS announced on October 31, marking the second month the key measure was below the 50-mark that indicates a contraction in production. The non-manufacturing gauge, which measures activity in the construction and services sectors, dropped to 52.4, well below the consensus forecast.
China suffered nationwide power shortages in late September and early October caused by surging global coal prices and Beijing’s orders to cut carbon emissions. The crunch was especially acute in the three northeastern provinces of Liaoning, Jilin and Heilongjiang, which are home to nearly 100 million people.
China’s benchmark Qinhuangdao coal price skyrocketed to nearly 1,000 yuan (US$155) per tonne by the end of June, up dramatically from 566 yuan per tonne at the end of February. Coal prices rose to 1,200 yuan per tonne between July and September, a price point that caused many power producers to lose money under Beijing’s price cap system.
A CITIC Securities research report said coal prices would remain high in the coming months due to the rising demand for heat in northeastern China. It said the record high coal prices would increase inflationary pressure across different industries and raise raw material prices. CITIC predicted China’s PPI would probably stay above 9% for several more months.
Lin Boqiang, dean of the China Institute for Energy Policy Studies at Xiamen University, said the recent decision by the State Council to remove electricity price caps for energy-intensive sectors would increase production costs for a wide range of companies, citing in particular aluminum anodizing firms and chemical suppliers.
Lin said if these companies did not reduce production, their rising costs would be passed on to downstream sectors, further inflating the PPI and raw material prices and eventually weighing down on broad economic growth.
China’s gross domestic product (GDP) rose 4.9% year-on-year in the third quarter, slightly lower than market expectations of 5%, the NBS said on October 18. Economic growth has downshifted considerably from the 18.3% seen in the first quarter and 7.9% in the second quarter.
Authorities are scrambling to maintain power supplies to avoid a major fall in growth. On October 8, a State Council meeting chaired by Premier Li Keqiang decided to allow power plants to increase their rates by 10% for residents, agricultural firms and public utilities and remove the price cap altogether for energy-intensive sectors and industries.
It also urged Inner Mongolia and Shanxi provinces to boost their coal production and required northeastern provincial authorities to ensure people had heat in their homes.
National Energy Administration official Yu Bing told a press briefing on October 13 that the power shortage had eased after electricity plants increased production. Yu also said authorities would take more measures to ensure stable electricity and heat supplies in northern regions during the winter and early spring cold seasons.
Over the medium term, he said the country would accelerate the construction of power generation projects and help to reduce the operational costs of existing plants.
Li Ming, an engineer at the State Grid Corporation of China, told the same media briefing that the country’s hydroelectricity generation was lower than expected this year. He said the nationwide power supply could meet needs for now but rising demand for heat during the winter season could worsen the situation.
Although electricity and heat supplies in northeastern China have remained steady since mid-October, higher heating fees are stoking consumer complaints in social media posts.
In several residential districts in Nong’an County in Jilin province, people must pay a heating fee of 45 yuan per square meter this year, 50% higher than the 30 yuan per square meter charged in 2020.
That means a family living in a 100-square-meter apartment would have to pay a one-off heating fee of 4,500 yuan for the period between late October and next March. According to official statistics, private and public sector workers makes 43,928 yuan and 77,631 yuan per year, respectively, in northeastern China.
A property management firm told residents in Nong’an county they would face a one-week water suspension if they failed to pay the basic heating fee, 20% of the total, on time, mainland newspapers reported.
A staff member at a heat supplier in Nong’an county said the company suffered from rising coal prices, which had grown from 600 yuan per tonne in May to 1,800 yuan per tonne at present. He said northeastern provincial and municipal governments had sent officials to buy coal directly in Inner Mongolia and Heilongjiang, but the coal supply had remained tight.
He said officials had to stay at coal mines and grab the coal whenever there was output.
On October 27, the government in Nong’an county announced a cap on the heating fee for residents at 35 yuan per square meter for this season. The government said it would offer a subsidy of 5 yuan per square meter to heat suppliers, which had to bear the remaining cost of 5 yuan per square meter.