Thread by @KellerZoe

China's crunch will rock the whole world. China demand is already wilting and that's the cure for high energy prices.
by AEP
telegraph.co.uk/business/2021/…

China’s energy crunch is happening for much the same reasons as in Europe. Covid upset the rhythms of the global fuel market. The weather was extreme: drought hit hydro-power. The hot summer boosted air conditioning. The result was an explosion in demand for coal and gas.

The cost of LNG (Liquefied Natural Gas) in Shanghai reached $26 MBBtu, luring away shipments to Europe's depleted inventories. China is now the world’s biggest LNG importer: in Aug it bought 6.4m tonnes (compared to 4.9m by Europe + Turkey combined).

Chinese coal stocks are now down to 18 days’ cover, deemed dangerously low by Beijing. It has long been the nightmare of Communist Party planners that the US might weaponise China’s dependency on fuel imports in a crisis.

State-run China Energy News said thermal coal inventories at power plants are critically low. “We are looking for coal everywhere, but no matter how high the price is, it is not easy to find,” said one utility.

Plants cannot pass the surging cost on and are losing money on a systemic scale. Banks are pulling credit lines. Regions accounting for 70% of China's GDP are rationing power to industrial users or have halted operations altogether.

Large parts of northeast China are facing power cuts for several hours each day, hitting traffic lights and cell phone masts. Yicai Global warned of power outages and water shortages until next March.

Guangdong in the south is to halt the use of lifts in office blocks below the third floor. Air conditioners should not be set lower than 26 degrees at businesses and households. Electricity is being rationed for cranes at the port of Tianjin.

Dozens of plants processing soybeans, feed and vegetable oil have been suspended. The steel, cement, aluminium and chemical sectors are under restrictive orders to avoid peak hours. Firms in the Zhejiang textile hub have been shut until the end of Sept or face de facto triage.

“With market attention laser-focused on Evergrande and unprecedented curbs on the property sector, another major supply-side shock may have been underestimated or even missed by markets,” said Ting Lu, China strategist at Nomura.

Nomura expects China’s economy to contract by 0.2% this quarter and barely eke out any growth over the rest of the year. That is a double-dip recession.

It is puzzling that global markets have been so insouciant about China power crisis. The slowdown is happening just as fiscal stimulus fades in Europe and America, as Western central banks start to tighten in the face of incipient stagflation and a rapidly rising misery index.

Talk of a Chinese “Lehman Moment” as developer Evergrande collapses has obscured a greater danger. Xi Jinping has deliberately precipitated a crunch in China’s encephalitic property sector deeming a purge necessary to safeguard social order and prevent further misallocation.

Construction accounts for 1/4 of Chinese GDP and it diverts funds from the green, hi-tech, robotics, AI, cloud computing, and advanced semiconductors sectors, where the struggle for superpower mastery is really taking place.

Xi has brought forward a crisis bound to happen anyway: China’s workforce is shrinking by 3 million a year, marriages have fallen by 1/3 in 7 years, household formation has slowed, rural migration has ended. Buyers will be scarcer. Land sales were down 64% in Aug '21 from Aug '20

The property squeeze is compounded by a parallel squeeze on carbon. Xi has promised peak CO2 emissions by 2030, a 25% cut per unit of GDP by 2025, and a 3% cut in energy intensity this year.

Xi knows that China is paying a high credibility price for foot-dragging as Europe and the US launch green deals (nobody can hide behind Trump any longer), and may soon face a carbon border tax in its top markets if it is not careful.

Energy-saving edicts are raining down. Party cadres have been mobilised to pursue CO2 crimes and are reportedly doing so with the zeal of the Cultural Revolution. The state planner (NDRC) says 20 Chinese provinces have failed to meet this year’s goals on cutting energy intensity.

Nomura says 9 have received “Level 1 warnings”, including Guangdong and Jiangsu (35% of China’s economy). The steel, cement, and aluminium industries face production caps by the industry ministry (MIIT): it means drastic falls in steel output.

But the cure for high energy prices is high energy prices: demand wilts. It is happening with breathtaking speed in China. Yuriy Vitrenko, Ukraine’s gas and pipeline chief, told me demand destruction is already working its brutal cure and global gas prices have probably peaked.

It might seem hard to believe with storage so perilously low. The futures for UK contracts show prices rising in seasonal contango, hitting 187p per therm in January.

But markets roll over when you least expect. Depressed investment in upstream oil and gas implies a fossil supercycle in the early 2020s, but I watch with a jaundiced eye as GS raises its crude oil forecast to $90 this year, citing gas-to-oil switching for power plants.

Goldman issued its infamous $200 call for crude in 2008 at the exact top of the price spike, when core Europe was already in recession and America’s subprime debacle was nearing its climax, with giant pillars of Fannie Mae and Freddie Mac already crumbling.

If China is slowing as hard as doubters suspect, it will do the world a big favour and head off an energy (and political) crisis in Europe and in the UK this winter. It may also head off a backlash against net-zero policies at a delicate moment in the transition ...

... before the benefits of cheaper post-fossil energy become self-evident and there is no looking back. So unless you are a climate denialist, raise a glass to Xi Jinping.