On 19 June, 2008, the National Development and Reform Commission (NDRC) issued an announcement to raise domestic electricity price effective on 1 July. According to the announcement, the national electricity retail price has increased by RMB0.0252/KWH or 4.7% on average. China’s six major regional grids including South China, Central China, East and North China, Northeast and Northwest China Power Grid released their respective adjustments of electricity price. China’s heavy industry is the hardest hit by the current policy changes, enduring an average 3% markup of electricity price.
Regional Electricity Price Increases: (Unit: per KWH)
North China Power Grid: Beijing (3 cents), Tianjin (2.82 cents), northern Hebei province and southern Henan province (2.5 cents), Shandong Province (2.6 cents), Shanxi province (2.9 cents) and western Inner Mongolia (2.3 cents).
Northeast China Power Grid: Liaoning province (2.5 cents), Jilin province (1.72 cents), Helongjiang province (2.3 cents) and eastern Inner Mongolia ( 1.57 cents).
Northwest China Power Grid: Shaanxi province (2.19 cents), Gansu province (2.27 cents), Qinghai province (1.91 cents), Ningxia Hui Autonomous Region (1.98 cents) and Xinjiang Uyghur Autonomous Region (2.5 cents).
Jiangsu Power Grid: Shanghai (3 cents), Zhejiang province (3.21 cents), Jiangsu province (3.01 cents), Anhui province (2.7 cents) and Fujian province (2.97 cents).
Central China Power Grid: Hubei province (2.98 cents), Hunan province (2.5 cents), Henan province (2.67 cents), Jiangxi province (2.1 cents), Sichuan province (1.33 cents) and Chongqing (3 cents).
The move is adopted to mitigate losses in domestic power generators incurred by rising coal prices since the start of Q307.
In late 2004, the Chinese Central Government has introduced the coal-electricity linkage policy, stipulating that if average coal prices rise more than 5% within 6 months, electricity prices will be adjusted accordingly.
In May 2005, the Central Government implemented the coal-electricity linkage policy for the first time and raised the electricity price by RMB0.0252/KWH. The second round of coal-electricity price linkage was launched in May 2006, with the average price increase also at RMB0.0252/KWH.
China’s rising thermal coal prices began to speed up in Q307 and the growth pace was accelerated due to supply crunch following the snow storms that had stricken the southern part of China during February-March. Relevant statistics showed that the increase of China’s thermal coal prices has far surpassed the 5% rate in the past six months.
However, to avert a break-neck growth in consumer price index (CPI), the Central Government has not yet to publish any relevant policies to rein in soaring coal prices but a series of control measures have already been taken. Take Shandong province for instance, peak-hour power prices have been lifted by 70% in June 2008.
The price increase for power, thermal coal and other energy resources will push up the production costs of chemical industries. Take chlorine-alkali and calcium based PVC producers for example, the power consumption for per ton calcium carbide is 3,500-3,600 KWH power, and producing per ton PVC resin will deplete 1.5-ton calcium. Then the average power price increase RMB0.0252/KWH will translate into RMB140/mt rise in production costs. As for caustic soda, with a power consumption of 2,400 KWH per ton will endure a production cost increase of RMB60/mt. Liquid chlorine production will also have an additional costs.
China’s booming chlorine-alkali and PVC industry must be attributed to the decisions to levy anti-dumping duties on PVC imports to China released on 29 September 2003. With imported PVC decreasing, the acute domestic supply shortages have pushed up PVC prices, bringing producers record high profits. The lucrative PVC industry has attracted massive inflows of capitals with new and expansion projects proliferating.
China’s total PVC capacity expanded more than 30% during 2004 and 2005 and logged a 20% increase in 2006 and 2007.
China is rich in coal but lacks oil and gas, which provides a favorable developing environment for calcium carbide based PVC production. Thus, a majority of PVC manufacturers in China adopt the calcium carbide as raw materials, with only a minority using ethylene and mixed process.
As for the calcium carbide process, the power consumption for per ton calcium carbide mounts to 3,500KWH. Since that China’s major power supply is contributed by coal-fired power generation, the domestic calcium carbide PVC production is heavily reliant on coal supply and the increase of power or thermal power prices will directly push up the production costs of calcium carbide PVC producers.
Data Source: CBI
The rapid expansion of calcium carbide PVC capacity during 2003-2006 was beyond expectation. The above figure shows that calcium carbide process accounts for more than 60% of China’s total PVC capacity and serves as the gauge of PVC price trends, so any increases in power or calcium carbide prices and any policy changes will directly impact China’s PVC production. This is clearly seen in the following chart, which reflects the prices of calcium carbide based PVC products keep in line with the calcium carbide prices since October 2004.
The Central Government’s power price rise and restrictive policies on China’s calcium carbide and chlorine-alkali industries forced domestic PVC producers to begin restructuring in 2005.
Data Source: CBI
The above chart shows the price spread between calcium carbide and ethylene based PVC products since September 2003 caused by differences in products quality and production process. The spread broadened from RMB50-100/tonne to RMB200/tonne following the announcement of anti-dumping sanctions against PVC imports to China and reached RMB500/tonne in September 2004 before stabilizing at RMB200-300/tonne with a clear market pattern showing up.
Market variations often respond to price differences. During 2005-2006, numerous PVC downstream enterprises shifted from ethylene to calcium carbide process in order to save costs. The intensified competition for seizing PVC market share forced most ethylene based PVC producers to cut operating rates so as to balance its sales.
Since late 2006, domestic ethylene based PVC enterprises have began increasing their sales volume of products made from imported or supplied materials in export and re-export markets, whereby avoiding the import duties on raw materials and impacts from export rebate rates. Such a competitive edge was fully displayed in 2007. Domestic PVC producers, including LG Dagu, Suzhou Huasu and Tosoh Guangzhou are slashing domestic sales in a bid to make way for exports. Only four producers, including Qilu PC, Tianjin Dagu, Shanghai Chlorine-alkali and Formosa Ninbo maintain stable domestic sales for ethylene based PVC products, but the volume is low.
Thus, calcium carbide based PVC products are occupying an increasingly large proportion in domestic PVC market. As a major PVC production base in China, east China is the hardest hit by the current electricity price changes. Higher labor and capital costs in east China than the middle and western regions and the need to outsource raw materials are sharply increasing the combined costs at local PVC producers. However, difficulties to pass on all the additional costs to end-users have forced most PVC producers in Jiangsu to cut operating rates in the second half of 2006 so as to fend off losses.
With more restrictive policies coming out, many market players expect calcium carbide based PVC enterprises in the east part and coastal areas of China to suspend operation or shift production. In fact, similar plans have already been taken into consideration. The release and implementation of the policy packages is set to enhance the transformation of China’s PVC production industry.