Sectors need urgent reform By Zhu Qiwen (China Daily) Updated: 2004-11-27 08:51
The year-end dogfight between coal mine owners and power companies might turn
out to be a needed stimulus for reforms in both sectors, though few expect the
playing field will slope decisively in favour of the coal industry.
Representatives of the country's 30,000-odd coal mines will soon meet their
counterparts from the five giant power groups to discuss next year's coal prices
in generating electricity as they have done every year for the past decade.
This year's tight market will undoubtedly embolden the coal industry to ask
for higher prices, intensifying their bitter bargaining with the mighty power
firms.
China has unshackled the price of coal for uses other than power generation
since the early 1990s. But as for coal supply to thermal power plants, pricing
power has long been lying with the demand side. Power price is strictly
controlled by the government. State-owned power companies have frequently
availed themselves of such price regulations to keep down coal prices.
Sluggish market demand over previous years once forced coal mine owners to
endure low prices offered by power companies.
Yet since the country's coal consumption has substantially rebounded in the
past two years, they have found such low prices increasingly unbearable.
Coal is China's largest energy source, accounting for 70 per cent of its
total energy consumption. Two thirds of the country's power supply were
generated with coal.
As the world's leading coal producer, China's output was 1.29 billion tons in
the first 10 months of this year, a year-on-year growth of 16 per cent.
Since supply still falls short of demand, coal prices have kept spiralling
upward. To help power generators cope with rising coal prices, the country
raised its electricity rates twice this year.
These relatively lower prices of coal for power generation are naturally more
unsatisfactory to coal mine owners. They want more.
To justify their argument, some from the coal industry have resorted to the
sympathy of the public.
In comparison with the power sector, the coal industry looks much poorer. For
instance, in coal-rich Shanxi Province, the average income for a coal mine
worker was 12,000 yuan (US$1,450) last year, about a third of what an employee
in the power sector earned.
Worse, coal mining is considered one of the most dangerous jobs in China.
China produced 35 per cent of the world's coal last year, but reported 80 per
cent of all deaths in coal mine accidents, according to statistics with the
State Administration of Work Safety.
In the past month alone, coal mine accidents caused more than 200 deaths.
Higher prices for coal should enable mines to pay for better and safer
working conditions - or so you might think.
The argument carries little weight with the public, who witness accident
after accident, death after death in China's pits.
Though the market now plays a dominant role in fixing coal prices, the coal
industry itself is a long way from being a competitive industry in which sound
market rules prevail. Worker interests have not found enough representation nor
are adequately protected in coal mines.
The government has taken some measures to keep a close eye on the safety
conditions in coal mines. Such stop-gap measures are needed. But a more
important role the government should take on is to throw its weight behind coal
miners to enhance their bargaining power with mine owners.
If the current prices for power generation are unfair, the fact that coal
miners have born the brunt of its consequences is even worse.
Market-oriented reforms should be deepened in the coal industry. Only when
workers' interests and rights are fully protected can sound market rules work
and be sustainable.
In the power sector, which is still monopolized by several State-owned firms,
the problem of market-oriented reforms can only be more imperative.
China generated 1.74 trillion kilowatts of electricity per hour in the first
10 months of the year, up 15 per cent from the same period of last year.
But 24 provinces and municipalities were forced to cut off electricity due to
power shortages in the same period.
Sustainable growth in the power sector is central to the country's long-term
growth. A power sector so accustomed to central planning cannot be expected to
respond swiftly to the growth of the Chinese economy, which is steadily shifting
towards a market economy.
The power sector was blamed for the slow growth of installed capacity that
bottlenecked the country's latest round of development.
Central planners deliberately held back investment to generate electricity to
give existing power plants a break from undercutting each other as the country's
economic growth slowed down in the late 1990s.
But the power sector seems to have a very short memory.
As the Chinese economy has picked up in recent years, power firms are
desperately expanding their investment plans.
It has been reported that in the first two months of this year alone, the
additional capacity of new construction plans submitted to the State Development
and Reform Commission amounted to 250 million kilowatts, about two thirds of the
nation's installed capacity.
Such an investment fever gives no consideration of market prospective or the
rising cost of coal.
So far, the power sector has apparently not taken seriously many insiders'
warnings that installed capacity might far exceed demand in as little as five
years.
In terms of cost control, State-owned power firms are still inclined to press
for a "preferential" price for the coal they consume.
Given mounting inflationary pressure, the central authorities have little
room left for manoeuvre after two electricity rate rises this year.
It is likely that the coal industry's demand for higher prices will again be
made subject to the need to maintain a stable electricity rate this year.
The authorities have come up with a decision to peg the price of coal for
power generation to electricity rates. This means the coal industry can raise
coal prices in line with power prices.
By binding the pricing power of the more market-oriented coal industry with
that of the heavily-planning power sector, the authorities can bring the two
sides back to the table for the moment.
But a long-term solution is still needed.
Policy-makers have many questions to answer - such as how to maintain
adequate power supply and how to gradually include environmental cost into
energy prices without risking serious inflation.
Nevertheless, as to the power sector, market-oriented reforms like the
separation of power grids from power plants to encourage competition is a matter
of urgency.
The authorities who will be responsible for co-ordinating collective year-end
negotiations between the coal industry and power firms need to keep it in mind -
their major task is not just to make temporary agreements, but to press
necessary reforms on both sides.
