SHANGHAI, Oct 22 (SMM) - According to SMM statistics, as of October 1, the regions that received the power rationing notices involved Heilongjiang, Jilin, Liaoning, Guangdong, Jiangsu, Zhejiang, Shandong, Anhui, Henan, Fujian, Ningxia, Qinghai, Inner Mongolia, Shanghai, etc.
There are two main reasons that have led to the current strict power restrictions in many places. First of all, the sharp rise in coal prices is the main reason for the stringent power rationing. The less-than-expect increase in coal production in September as well as the still robust demand have pushed the coal prices to highs. Take thermal coal as an example, since late August, the prices of thermal coal futures have continued to soar from less than 800 yuan/mt, and moved all the way up to 1982.0 yuan/mt. As of the close of October 19, the futures reported 1835.6 yuan/mt, and the spot price of 5500 kcal thermal coal at Qinhuangdao Port has risen to more than 2,350 yuan/mt. The coal-fired power companies are losing money amid surging coal prices, and power generation efficiency has dropped drastically.
In addition to factors such as the sharp rise in coal prices, the economic recovery across China after the COVID-19 pandemic has been strong, and the rapid growth of electricity demand has also led to the short electricity supply. According to relevant data, in 2021, the maximum power load will increase significantly. The monthly growth rate of the maximum power load in east China, central China, north-west China, and south China will be between 10%-30%. The power load of these 4 regions have recorded new highs six times in this summer. As such, the rapid growth of power consumption demand has led to a shortage of power supply in many places.
On October 11, the National Development and Reform Commission issued the Notice on Further Deepening the Market-oriented Reform of Coal-fired Power Tariffs Distributed through the Power Grid (the “Notice”). The Notice has clarified the detailed electricity reform measures as follows:
First, the power tariff for all coal-fired power distributed through the power grid will be liberalized in an orderly manner. In principle, all coal-fired power will enter the electricity market; and the electricity prices will be formed by following "base price + fluctuations" through market transactions.
The second is to allow wider fluctuations in market transaction of electricity prices. The one-sided fluctuation range of coal-fired electricity market transaction prices will expand from the previous limit of 10% upwards and 15% downwards to 20% in principle, while the energy-intensive enterprises will not be subject to the limit of 20% upwards.
According to SMM calculations, after the new round of power reform, the electricity prices will rise to some extent. As for steel mills, according to SMM research, during the blast furnace production process, the electricity consumption per ton of crude steel is about 180-220 kWh. If the electricity price rises by 0.1 yuan/kWh, the cost of crude steel per ton will increase by 18-22 yuan. During the production process of electric arc furnace (EAF), the electricity consumption per ton of crude steel is about 450-500 kWh. If the electricity price rises by 0.1 yuan/kWh, the cost of crude steel per ton will rise by 45-50 yuan.
Take Zhejiang in east China as an example, on October 3, the Zhejiang Provincial Development and Reform Commission issued the Zhejiang Province's Implementation Measures on Establishing and Improving Energy-intensive Industries’ Tiered Electricity Prices and Punitive Electricity Prices for Unit Product Exceeding Energy Consumption Quota (Draft for Solicitation of Comments). Zhejiang intends to increase the electricity prices for energy-intensive industries by up to 0.35 yuan/kWh. According to the calculation of power consumption per ton of 500 kWh in the process of EAF steelmaking, the cost of crude steel per ton will increase by nearly 175 yuan.
According to SMM data, as of October 20, the profit of EAF steel mills in east China was 725 yuan per ton of steel. Even if the electricity price does increase, there will be basically no electric furnace steel enterprises that will reduce the operating rates. In the short term, the energy consumption control policy (power rationing) will be the major challenge for EAF steel mills.
At present, all parts of the country are actively responding to the call of the central government, and have started to cut or control electricity consumption. The iron and steel enterprises have also been required to cut or suspend production. In the following fourth quarter, with the effects of strict power rationing, dual energy consumption control, environmental protection-related restrictions during the heating season, and Winter Olympics management and control, it is expected that the steel supply will continue to remain tight. At the same time, power rationing will also have a certain degree of impact on terminal demand.
With the gradual implementation of the power reform, the tight supply of coal and power will ease, and the constraints on economic development will also be reduced.
