China power crunch

In view of the severe power crunch in china, we would to give our view on this matter.

1. Due to sanction on Australia coal last year, china has stepped up on domestic coal mining in the earlier part of 2021.

2. By the mid of 2021, a series of deadly mining incidents have prompted local authorities to temporarily close 1/4 of the northern private mines. Without the high quality coal from australia and closing down of these domestic private coal mines, these factors have lead to the current spike in chinese coal prices by more than double.

3. With the instruction from central government to keep electricity bills stable to combat inflation, many of the state owned power providers have chosen to cut electricity in order to curb the huge losses in profits.This is why we are starting to see power crunch in china.

4. With central government has allowed local authorities to restart all the private coal mines to tackle the current issue and in preparation for the cold winter, we view such relaxing of measure to be temporary.

Many analysts have not touch on the big picture on why china is so hurried to curb the carbon emission especially reducing the reliance on coal.

5. The key point is that the EU will start a 2023 carbon tax on goods from other countries that cannot fulfill the carbon emission requirements as agreed at the Paris Agreement. USA will also commence this from 2024. Such policy will hurt chinese exports badly and the central government has to drastically do something as time is running out to meet the carbon emission.

https://www.forbes.com/sites/jonathanponciano/2021/07/19/report-democrats-to-propose-border-tax-based-on-carbon-emissions-to-raise-up-to-16-billion-annually/?sh=377b8a4456d4

6. Hence, we view that inflation and steel price will remain strong. Power crunch will be more frequent and unpredictability. Neverthless, chinese government will still from time to time intervene to cool the hot commodities prices to prevent inflation from getting out of hand. However,government's main direction is still to curb steel production and usage of coal to achieve the carbon emission requirement. Therefore, do not expect any big drop in steel price with such green policy in place.