How Long Will the Energy Crunch Last?
Hingsight is all well and good so here are some guesstimates
In my previous piece I demonstrated the the energy crunch we are seeing globally has its roots in China producing less coal than it needed and having to import a lot more of it along with pipeline gas and LNG. I am not the only person to notice this, Lauri Myllyvirta has an excellent piece in Foreign Policy:
So it comes down to two things:
How fast can China ramp coal output?
What is happening to China’s power demand?
For both there is good news. China in a crisis tends to represent a command economy and per recent reports the commands are coming thick and fast:
The main rail lines to move coal from inland to ports are the Daqin and Shenshuo railways but they generally have maintenance in October which is normally a time of mild weather and low power demand. For this reason the coal will not arrive at the coast in significant volumes until late October or November but all indications are that mine output is ramping up hard. Markets tends to follow inventory levels closely and those should stabilize towards year end though the weather is an important variable here. On balance supply should be much higher and it will probably not take long to ramp up given high quality infrastructure and heavily mechanized mines.
On the demand side the news is good for solving the energy crunch. China steel production is now down 10%+ year on year and all indicators of industrial power demand have rolled over.
This is before giving consideration to leading indicators of steel demand like the real estate sector which at this point is in a complete tailspin with land auctions and sales collapsing for all developers, not just Evergrande.
So on the whole I think this episode will be very short lived.
But do not take my word for it, look at what companies are doing. Peabody Energy and others are tendering for their bonds and issuing stock to deleverage as fast as they can and their largest shareholder, Elliott Associates, seems to be selling down too. I would be surprised if the likes of Crispin Odey is are not doing the same. Nobody is acting like this is a new regime or a lasting change because it probably is not.
China still has dysfunctional power markets that are likely to lurch from surplus to shortage until their design is improved and China’s growth model changes. That makes for fun for active investors but there is nothing good about this at all for China, for the world, for anyone who is not trading the crazy.
For Europe a “Dirty Harry” strategy with Russia may be appropriate if they can get through the next few months. Mr Putin clearly feels lucky and is holding back gas supply but it seem that time is actually on Europe’s side here.
Update: Also this happened.