Could Chinese Utilities Be Facing Bankruptcy?

The situation in China is getting a tenser. Is the second largest economy in massive trouble like some proclaim? Or is it a situation of propaganda?

While there is problem some validity that both are taking place, it is hard to deny there are some major headwinds facing the country. What we will discuss is far beyond the Evergrande situation, although the real estate developers problems are far from over.

In this article we will look at the energy sector, something that is vital to manufacturing.

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Indonesia Ban On Coal Exports

Is this a political move? It is not being framed that way.

Indonesia is banning the export of coal to China for the month of January. The reason given is the country is concerned with the domestic supply and is looking to ensure it has what it needs. To be fair, it is a ban on all exports of coal, citing internal rules concerning the production of coal.

Indonesia has a so-called Domestic Market Obligation (DMO) policy whereby coal miners must supply 25 percent of annual production to state utility Perusahaan Listrik Negara (PLN) at a maximum price of $70 per ton, well below current market prices, according to NASDAQ.

For this reason, it does not look political. That does not make the situation any easier on China. Simply put, the price of coal skyrocketing over the past year already put Chinese utilities in a tough position.

China's energy is heavily dependent upon coal. This puts them in a tough position. Of course, they are not alone in their consumption.

The International Energy Agency (IEA) last month said global demand for coal, the world’s biggest source of greenhouse gases, hit a record in 2021 and would be sustained into 2022, threatening plans set out at last year’s COP26 climate change conference to cut emissions.

Western Europe, long a promoter of green energy, saw their importing of coal skyrocketing after renewable energy production was far lower than estimated. Since many gas and nuclear plants were shut down, utilities has no choice but to fire up the coal plants. The caused a renewed push for coal.

Of course, a frigid Winter across the EU is only making the situation worse. This means more countries are trying to get their hands on coal, giving China some headaches.

The nation did cause some of their problems by getting into a squabble with Australia, another large coal exporter. Since they decided to ban Australian coal, the country saw a number of blackouts and rationing of energy had to take place in many provinces.

Chinese Utilities Cannot Pass Costs On

As we can see, the price of coal skyrocketed after the lockdowns. Like most commodities, the bull market was kicked off due to supply chain disruptions.

Chinese utilities are barred from passing on any more than 10% of their costs via a price increase. This means that any margins that were there are eaten up. This is not the end of the world in China since making a profit is always secondary. However, when an entity cannot recoup its costs, problems arise.

This is now the situation in China. With utilities struggling, the energy situation is only getting worse. Any country that is dependent upon imports is going to struggle. No longer is China going to simply acquire all they need. Countries are starting to take a different approach.

As mentioned, China is not the only country dealing with an energy crisis. In the EU, both Germany and Britain made headlines for their horrific energy situation. The rapid shift to renewables failed miserably as the production from those sources is not meeting demand. This is putting them in a position of needing more natural gas, something that plays into the hands of the Russians.

Getting back to China, the utilities are likely going to require money from the government to stay afloat. The relationship between Chinese businesses and the government is varied to say the least. For many outside the country, there is really no line. Anything the CCP wants it basically can take.

Nevertheless, as the leading manufacturing center and the top exporter, an energy crisis is not helpful to the country. Power is needed for plants to make stuff. Without it, production ceases which puts the already slowing growth rate in jeopardy.

It seems to be an ongoing sage in the country. This is how the situation often arises. We start to see one facet of the economy go, and the rest follows.

We will keep an eye on that part of the world to see how this all unfolds.

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