China | Coal having destabilizing effect on China's economy
A coal-to-oil plant in Changzhi, in Shanxi province. Photo: AFP/Fred Dufour
A coal-to-oil plant in Changzhi, in Shanxi province. Photo: AFP/Fred Dufour

Coal having destabilizing effect on China’s economy

Country's leaders unhappy with soaring cost of fossil fuel as consumer price index rises 2.1%

November 9, 2016 4:44 PM (UTC+8)

The most obvious link between the 1.2% rise in China’s Producer Price Index and the 2.1% increase in the Consumer Price Index in October is the dramatic spike in coal prices. Beijing is not smiling.

While the rebound in industrial prices is generally interpreted as an encouraging sign of better economic conditions, the recent emergency meetings between the National Development and Reform Commission and the coal producers made it absolutely clear that the Chinese leadership sees the ongoing surge in coal prices as a destabilizing threat to the broader economy.

Ex-factory gate prices rose 0.7% in October, the biggest jump in six months, led by the whopping 9.8% surge in the market prices of coal during the month.

The National Bureau of Statistics (NBS) highlighted that the coal sector single-handedly contributed approximately 30% of the Producer Price Index (PPI) gains last month, followed by a few more energy-intensive heavy industries.

“Coal, ferrous metal, non-ferrous metals, oil, and gas producers together drove the PPI up by about 1.4 percentage points when compared with a year ago,” said Yu Qiumei, a senior analyst at the NBS. Given the 1.2% year-on-year PPI reading, it means deflation is still stubbornly lingering outside of the handful of sectors.

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Soaring coal prices can also be a bad news for factories struggling to pass on the more expensive fuel cost. Steel plants are definitely among them. The NBS report shows that the monthly increase in ferrous metal prices eased to just 0.8% last month after gaining 1.5% during September. Clearly, the recovery in the steel sector is being impaired by the unexpected high coal cost.

Residential heating

At the consumer end, prices were generally steady over the month and in-line with economists’ estimates of CPI growing 2.1% compared to a year earlier.

Fresh food prices are coming down seasonally with the arrival of winter bringing about a greater supply of late harvest vegetables. Egg, pork, seafood prices are also coming down. Food CPI came in at 3.7% for October, while non-food CPI increased 1.7%.

The only item that stood out is once again related to coal. Residential heating coal prices jumped 3.7% in the month with Chinese consumers stocking up for a chilly winter.

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