Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't so, Joe. We've
Speaker 1: been talking quite a bit about supply chains. That's correct
Speaker 1: for now, like pretty much like well over a year.
Speaker 1: But yes, absolutely it's not going away. Yeah, that's probably
Speaker 1: an understatement. So one of the things we have definitely
Speaker 1: learned over the past year or so is that when
Speaker 1: one part of the global supply chain I guess flaps
Speaker 1: its wings or experiences a disruption or whatever, it tends
Speaker 1: to ripple through a bunch of other things. And I
Speaker 1: think that's arguably what we've seen with energy prices and
Speaker 1: with the big surge in prices over the past few months. Yeah,
Speaker 1: I think like commodities, and of course commodities are very
Speaker 1: sort of heart you can't deal them from global industrial
Speaker 1: processes and supply change in general. Like it feels like
Speaker 1: what we talk commodities, that it's like a there is
Speaker 1: a very high level of demand the GDP around the world,
Speaker 1: growing very fast, particularly as economies returned to trend or
Speaker 1: in some cases maybe even overshoot the previous trend. And
Speaker 1: then there is also the sort of idiosyncratic factors that
Speaker 1: pop up that are not really macro. Maybe it's related
Speaker 1: to weather, maybe it's related to environmental changes that inhibit production.
Speaker 1: Maybe it's sort of something else, and it's like that policy.
Speaker 1: So it's like that combination of very tight, very strong
Speaker 1: demand and then any ripple or any speed bump anywhere,
Speaker 1: or any change on the supply side really gets magnified. Yeah.
Speaker 1: So this was something that Jeff Curry at Coleman Sacks
Speaker 1: brought up on one of our episodes last year when
Speaker 1: we were discussing high energy prices and the commodities rally.
Speaker 1: He I think he said that actually, what was happening
Speaker 1: in European gas actually began with a coal shortage in China.
Speaker 1: So there wasn't enough coal in China and they had
Speaker 1: to find a substitute energy source, and what they found
Speaker 1: was oil and gas, and that eventually fed through into
Speaker 1: European prices. So I guess what I'm saying is, if
Speaker 1: you think of China cole as ground zero for higher
Speaker 1: energy prices that rippled throughout the world, it seems like
Speaker 1: we should dig into that. Yes, I'm very curious what's
Speaker 1: going on with China and energy because there's lots of
Speaker 1: different things happening at once. There's the Olympics coming up,
Speaker 1: there's domestic policy changes, which we've talked about quite a bit.
Speaker 1: There's long term goals on changing the energy mix. I
Speaker 1: don't feel like I have much insight into it other
Speaker 1: than that is extremely important beyond China's borders. So yes,
Speaker 1: we need to dig it further. Okay, Well, I am
Speaker 1: pleased to say that we are going to do exactly that.
Speaker 1: We have Alex Turnbull of fund manager based in Singapore
Speaker 1: and some when he has done quite a bit of
Speaker 1: research into China's coal market. So Alex, welcome to the show,
Speaker 1: Thank you very much. So I guess my first question,
Speaker 1: just to lay the groundwork for this discussion, one of
Speaker 1: the unusual things about the China coal market, as I
Speaker 1: understand it, is that China does actually have a decent
Speaker 1: amount of coal within its borders, but it also imports
Speaker 1: a lot of its coal supplies. So I guess my
Speaker 1: question is why does that happen? Why do they do that?
Speaker 1: Why not just dig up what they have already? Sure,
Speaker 1: with any commodity which is reasonably lower dollar value per ton,
Speaker 1: it's best to think of it as not a price
Speaker 1: where if you want to buy ann ounce of gold
Speaker 1: from someone it's sufficiently high value, they can mail it
Speaker 1: to you or exported quite easily. With things that are
Speaker 1: relatively low value, per toime, transport costs are incredibly important
Speaker 1: and locational constraints are very important. So it's a little
Speaker 1: bit like gas pipelines where just because someone wants to
Speaker 1: buy gas somewhere, it doesn't mean you can actually deliver
Speaker 1: it to them, will deliver it to them an economical price.
Speaker 1: So with Cole, it's really these locational dynamics that make
Speaker 1: it quite a quirky market in some respects. Just like
Speaker 1: nine seconds into this discussion, I'm already finding that to
Speaker 1: be like very useful. So I want to step back
Speaker 1: and asking even zoom zoom out even further before we
Speaker 1: get into the details. But it's in your research, like
Speaker 1: outside of China specifically, why is this a question or
Speaker 1: why is this a topic that interests you? And why
Speaker 1: should say anyone outside of China care that much? Sure, so,
Speaker 1: my background is in distressed debt historically and convertible bonds
Speaker 1: and the call sector repeatedly blew up over the course
Speaker 1: of the financial crisis. A few names got into trouble.
Speaker 1: There was a large protracted downturn in sixteen, and over
Speaker 1: that period SEV simultaneously worked on Peabody Energy, which went bankrupt,
Speaker 1: and also Mongolian mining, which also went bankrupt around the
Speaker 1: same time, had to be restructured. And so by seeing
Speaker 1: how those two businesses were actually quite tightly coupled in
Speaker 1: weird ways via the Chinese coal market and the quirks
Speaker 1: within the Chinese coal market and regulatory actions there. At
Speaker 1: a time, this is essentially the biggest energy market in
Speaker 1: the world. It's almost a quarter of the world's carbon emissions,
Speaker 1: just col and China, and it's recentably poorly covered and understood.
Speaker 1: So and the course of tweeting about this in I
Speaker 1: think it was mid I got a reply back from
Speaker 1: a friend who's a professor at the Istraelia National University,
Speaker 1: who said, what's all this about? And then we spoke
Speaker 1: about it for an hour or so. He said, why
Speaker 1: don't we do a paper about this? And I thought, well,
Speaker 1: we can probably get the data, or at least we
Speaker 1: can try, and so hence we went through this exercise
Speaker 1: of modeling the entire Chinese logistics, power and steel market,
Speaker 1: transport and the minds and the imports in a big simulation.
Speaker 1: So maybe we should get into what has actually been
Speaker 1: happening with the coal market in China. And you know,
Speaker 1: I'm looking at a chart of prices, and there was
Speaker 1: that spike late last year, sort of at the beginning
Speaker 1: of the fourth quarter, I guess, and it started coming
Speaker 1: down since then. So what exactly happened? I guess? What
Speaker 1: was the shock to China's coal system that set that
Speaker 1: price action in motion? This price volatility. Sure, so the
Speaker 1: thermal cole you had a similar problem to a lot
Speaker 1: of other commodities, and demand collapsed. There was supply continued,
Speaker 1: and while coal did not try at negative prices like oil,
Speaker 1: it was pretty good regiously oversupplied. At the same time,
Speaker 1: there were weather dynamics. So in the Chinese power market,
Speaker 1: the second biggest source of power is hydro electric power.
Speaker 1: So if you get a lot of rain or a
Speaker 1: very wet summer and spring in China, you then suddenly
Speaker 1: have a lot of cheap hydro power, which then displaces cold.
Speaker 1: So by Q four they were just about giving it away,
Speaker 1: But then there was a cold winter and then over
Speaker 1: the course of say March to May, one key coal
Speaker 1: mining province massively underproduced to the tune of output was
Speaker 1: down at the same time demand was recovering. Like in
Speaker 1: a lot of other places in the world, you had
Speaker 1: a real upswing in power to man and then by
Speaker 1: September there were in this I think in Guangdong on
Speaker 1: the data we have, they had less than six or
Speaker 1: seven days of coal inventory to burn. So if there
Speaker 1: was a typhoon that came through Hong Kong and the
Speaker 1: port's got shut for a couple of days, that would
Speaker 1: have been lights out in Guangdong, and prices of course
Speaker 1: would flying at that point. Then the government stepped in
Speaker 1: tell everyone to turn the minds back on it into
Speaker 1: Mongalia and now looks quite well supplied again. But it's
Speaker 1: been quite a roll of chinastry. I would say, in general,
Speaker 1: what is the mix look like in terms of how
Speaker 1: much coal it powers the Chinese economy, how much is
Speaker 1: domestic versus imported? And then also like what is the goal,
Speaker 1: because China aspires to like many other countries, reduced its
Speaker 1: use of call for environmental reasons and so forth, like
Speaker 1: what are the what are the ambitions? So China is
Speaker 1: the world's biggest call consumer, by quite a large margin,
Speaker 1: consumes about three and a half billion tons per year
Speaker 1: a thermal call to billion tons goes into power, the
Speaker 1: rest goes into a bunch of industries cement and so forth.
Speaker 1: And I am poor in general for thermal hell some
Speaker 1: o between two d and three hundred tons of year,
Speaker 1: but that can be quite volatile, and most of that
Speaker 1: is important into southern provinces like Wigan, Guandong, and Guanti,
Speaker 1: which don't have their own coal mines, and which are
Speaker 1: actually quite a long way from where China's coal mines
Speaker 1: are in the interior of the country in Shashi and
Speaker 1: in the Mongolia, and so China's currently trying to a
Speaker 1: achieve two major objectives. One is to have a stable
Speaker 1: energy supply and some semblance of order, but then its
Speaker 1: power market, which is entirely understandable, and also reduce its
Speaker 1: carbon emissions, which is also very understandable. But the question
Speaker 1: is given most of its coal actually goes into either
Speaker 1: directly or indirectly into the written do heavy industry, which
Speaker 1: is very heavily driven by real estate demand. Can they
Speaker 1: manage a real estate slow down or a change in
Speaker 1: growth model? So, if you think about it, their carbon objectives,
Speaker 1: the energy security objectives, and their financial rebalance and objectives
Speaker 1: are all these incredibly tightly coupled systems, and that they're
Speaker 1: kind of the same system in many regards when you
Speaker 1: do the carbon account. That's really interesting. So one thing
Speaker 1: I was wondering just on the policy front. So we
Speaker 1: did see China shut down quite a few minds, and
Speaker 1: specifically the older, dirtier minds. I guess how easy are
Speaker 1: those to turn back on or how flexible is new
Speaker 1: supply in terms of bringing additional capacity on stream. So
Speaker 1: what when they initially had a big clean out of
Speaker 1: the sector in sixteen, they did shut down a lot
Speaker 1: of smaller private miners which had a reputation for not
Speaker 1: being very compliant with safety standards, are being well capitalized.
Speaker 1: Then coal price has got a bit high in eighteen nineteen,
Speaker 1: then increased their capex for coal mining, and they told
Speaker 1: the largest players to build bigger, more efficient, more mechanized minds.
Speaker 1: And so when things slowed down in Q two of
Speaker 1: twenty one, that happened quite abruptly. I was quite surprised
Speaker 1: to market participants. No one could really explain why it
Speaker 1: was happening as demand was going up. So it subsequently
Speaker 1: emerged later, but then it was actually very easy to
Speaker 1: turnental back on because they were very centralized set in enterprises.
Speaker 1: So as soon as I put the memo out for
Speaker 1: everyone to my law, get that on trains and get
Speaker 1: it out, you saw daily call output explode. It actually
Speaker 1: had quite a lot of control when pushed hand to
Speaker 1: shop on that market. I'm saying, can you go back
Speaker 1: and maybe talk a little bit further about the way
Speaker 1: these various policy priorities dovetail with each other, And we
Speaker 1: actually just did an episode on the real estate sector
Speaker 1: and the attempt to transition some of the quality of
Speaker 1: GDP growth in China away from real estate speculation and
Speaker 1: real estate development, and then the broader decarbonization. Can you
Speaker 1: talk a little bit about further about the common thread
Speaker 1: there and how coal itself sort of fits into all
Speaker 1: of it. So most of China's energy demand, at least
Speaker 1: electrical power demand, actually comes from heavy industry, and the
Speaker 1: biggest heavy industries are in order appairance ferrost metals, which
Speaker 1: is basically steel, nonferrest metal, so things like copper and
Speaker 1: zinc and tum and then kind of chemicals and the
Speaker 1: cident when you do the flow of materials, so you
Speaker 1: track where does all the steel go, actually very heavily
Speaker 1: goes into construction. Where the emissions from steel come from.
Speaker 1: It's all electrical power and cold for I'm smelting steel.
Speaker 1: You see that. Essentially, the Chinese real estate sector accounts
Speaker 1: for in the order of China's total emissions depends on
Speaker 1: whose account and you're looking at, but it's it's enormous
Speaker 1: so and then heavy industry and that's just residential and
Speaker 1: that's commercial in the rest of it, and so heavy
Speaker 1: industry accounts for sixty seven seven I think at the
Speaker 1: last stata of China's powder man so and then Chinese
Speaker 1: domestic construction in general is what drives China's emissions more
Speaker 1: than anything else. Essentially, if you are if you want
Speaker 1: to reduce your carbon emissions and improve your energy security
Speaker 1: by importing less coal, you can build those apartments. You
Speaker 1: can build a lot of renewables to replace the coal,
Speaker 1: or a bit of both. But these things that these
Speaker 1: two functions are very tightly integrated. You know. It's always
Speaker 1: been an observation when people do modeling that if China
Speaker 1: were to get through at construction rate more in line
Speaker 1: with level lawns. It would be very easy for China
Speaker 1: to achieve quiet remarkable carbon targets, but it's proven very
Speaker 1: hard for China to change its growth model and move
Speaker 1: from a essentially a construction paradigm in real estate and
Speaker 1: certainly residential real estate. So I mean, assuming that China
Speaker 1: is at some point able to make some progress in
Speaker 1: changing the mix of its growth, and we do see
Speaker 1: house prices start to come down what we've already seen,
Speaker 1: Chinese house prices start to come down, and maybe housing
Speaker 1: inventory starts to be cut and we don't get as
Speaker 1: much construction of new homes. Assuming all of that happens,
Speaker 1: what happens in the energy space in terms of funding
Speaker 1: and capital. Is capital going to be an issue for
Speaker 1: Chinese energy or does all of that come from the state.
Speaker 1: It's it's very heavily state timed, so they essentially have
Speaker 1: access to if government policy is that they are to
Speaker 1: build some things and there will be capital available for
Speaker 1: them to build certain things, is the best way to
Speaker 1: think about it. It's not like in the house signs
Speaker 1: off on every single lot among the capex flans, But
Speaker 1: is unit see a vision. Let's go back to like
Speaker 1: the the effect outside of China's borders and the other things.
Speaker 1: You know, we've seen these sort of knock on effects.
Speaker 1: We've seen surging energy prices in Europe. It's been a
Speaker 1: very stressful winter, massive surgeon electricity bills. Not only does
Speaker 1: that hit the household sector there, it's also hit some
Speaker 1: industrial sectors. Fertilizer companies shutting down or temporarily because it
Speaker 1: just doesn't make sense. They can't be running economically at
Speaker 1: these levels. We started this discussion talking about the ripple effects,
Speaker 1: and so what are the ripple effects from China and
Speaker 1: how do they relate to what we're seeing elsewhere in
Speaker 1: the world. Sure, so that the challenge for China is
Speaker 1: that if China has a shortage and energy, a province
Speaker 1: in in a Mongolia has an anti corruption campaign, mond
Speaker 1: in protles done happen with some hauled up in production.
Speaker 1: The problem is is that if China needs to import
Speaker 1: a large amount of cold very quickly at short notice,
Speaker 1: it's very hard for China now too source that kind
Speaker 1: of volume of coal that it needs in the international market.
Speaker 1: The reason it is that China consumes three billion tons
Speaker 1: a year, so the thermal between ower, cement and heating
Speaker 1: and then the US consumed six over there, so it's
Speaker 1: like five times the size of the United States and
Speaker 1: about the Indias about the same the slightly smaller than
Speaker 1: the US. So it's sort of swamps any viable supply
Speaker 1: that might get from elsewhere if they had a significant
Speaker 1: shortage in China. And so then where you saw in
Speaker 1: China was that as coal prices rose, they were switching
Speaker 1: from cola burning coal to get electricity to gas. So
Speaker 1: someone the China started buying a lot of cargoes of
Speaker 1: lergy and you saw that in the shipping down to
Speaker 1: just exploit over the summer and over said from my onboards,
Speaker 1: when the when the when the eventure started to get
Speaker 1: low and so, and that of course taught in the
Speaker 1: gas markets at a time when Europe is normally building
Speaker 1: inventories into winter, and led to partners one of the
Speaker 1: contributing factors to very tight gas markets over this winter.
Speaker 1: So the problem is China is essentially it's like having
Speaker 1: an adult on a trampline with small children. It just
Speaker 1: is so bit now it can kind of launch other
Speaker 1: markets without even trying to. So what happens when China
Speaker 1: actually builds out its energy independence or security because this
Speaker 1: is something that we've seen explicitly as a policy goal.
Speaker 1: They want to reduce imports, they want to rely more
Speaker 1: on mining within their borders. What happens to that ripple
Speaker 1: effect if they manage to succeed in doing that, does
Speaker 1: that ripple effects start to come down or is it
Speaker 1: just so big that it's really difficult to reduce it.
Speaker 1: I think the challenge with coal is the China burns
Speaker 1: about six million tons a day, six and a half
Speaker 1: million tons of day during winter. Coal has got about
Speaker 1: the same density is water, So you know I would
Speaker 1: give it met out. The water is a ton, and
Speaker 1: so you think of what that means and ship volumes
Speaker 1: if you want to store that much coal. You know,
Speaker 1: you can literally see this from space quite happily, and
Speaker 1: many commodity traders do. And so the problem is that
Speaker 1: China is now trying to enforce inventory levels on coal
Speaker 1: mines and power plants. And that can work up to
Speaker 1: a certain point, but realistically it will have to either
Speaker 1: gradually become slightly less energy intensively significant less energy intensive
Speaker 1: through changing growth model. All have to move to sources
Speaker 1: of power which where it's a bit easy to manage,
Speaker 1: or lot of energy that's build a lot more renwobles
Speaker 1: and having a lot more hotter power and hot re storage,
Speaker 1: or a lot of nuclear. And from the latest energy plan,
Speaker 1: it looks like that people in a lot of nuclear
Speaker 1: and that will be actually in those coastal provinces which
Speaker 1: have been you know, international coal imported provinces um bigen gloxy.
Speaker 1: So I think over time they will they will essentially
Speaker 1: easit call market, so that is certainly their intent and
Speaker 1: become more self sufficient. But I don't think it's I
Speaker 1: think trying to manage these inventories they're trying to say
Speaker 1: very heavily fossil arranted when they accidentally consuming this much
Speaker 1: is very challenging. You know. I'm thinking one of the
Speaker 1: storylines out of Europe and again were trying need to
Speaker 1: talk about it more, especially because it has long term
Speaker 1: ramifications for the energy transition, is like there's perception that
Speaker 1: Europe has tried to transition to renewable maybe too fast.
Speaker 1: In the case of Germany is still shutting down nuclear,
Speaker 1: not maintaining like a robust baseload even as it transitions.
Speaker 1: Does China's attempt to transition long term off call and
Speaker 1: you mentioned that it's going to be investing more in nuclear.
Speaker 1: Is that going to allow it to like achieve those goals,
Speaker 1: to achieve the decarbonization goals while also not running into
Speaker 1: short term volatility, not running into a mismatch. And is
Speaker 1: nuclear an important part of making a transition sustainable? I
Speaker 1: think you can. It's very important for those southern provinces
Speaker 1: where you don't have great solid resources or that particularly
Speaker 1: good win resources, so you're out too on that account
Speaker 1: limited toro and you want to reduce your calling bots
Speaker 1: is not really a process of elimination. That's that's probably
Speaker 1: the way they'll go, and that's certainly what's coming out
Speaker 1: of their energy plants. I think you're there's a it's
Speaker 1: certain what the problem with the power price piration is
Speaker 1: not day to day, it's this seasonal storage. So it's
Speaker 1: how do you store up the energy you need for
Speaker 1: winter in the in summer, And normally you do that
Speaker 1: through hydro power or through just storyline running your gas
Speaker 1: storadopting ninety percent and then running it down as they
Speaker 1: do normally in Europe around February and March. But if
Speaker 1: you have trying to lift in all the spot eldry
Speaker 1: cargoes for their own reasons, and then Vladomia Putin has
Speaker 1: other plans, then that kind of runs into trouble. So
Speaker 1: it's not the variability of renewables tends to be like
Speaker 1: you're not sure that it's going to be on or
Speaker 1: off an you've given one hour period, but over the
Speaker 1: possible week, it's reasonably predictable, especially if it's a blind
Speaker 1: of solid and went. But where you can't really hedge
Speaker 1: is how do you how do you build up massive
Speaker 1: storage over the summer and then keep it for winds
Speaker 1: like a squirrel? Basically, So can I ask a really
Speaker 1: basic question on the renewable energy front, which is there
Speaker 1: was always suspicion about how serious China actually is when
Speaker 1: it comes to decarbonization, as in, is it actually going
Speaker 1: to meet the quite lofty goals that it's set out
Speaker 1: for itself. And so I guess my question is one
Speaker 1: how serious are they on the green energy front and
Speaker 1: decarbonization and to why decarbonization at all? Why is it
Speaker 1: important to them? Is it genuinely a climate concern or
Speaker 1: is it more about efficiency and building out that self
Speaker 1: sufficiency When it comes to energy security, well, I think
Speaker 1: historically the power regulations until quite recently do not We're
Speaker 1: not particularly come here, and I would cite the incentives.
Speaker 1: Do you tell these to take renewable power? Like in
Speaker 1: twenty sixty that the level of curtailment essentially when farms
Speaker 1: have produced power and not be able to sell the
Speaker 1: market was very high and there are a lot of
Speaker 1: market design issues. I think what they've done recently is
Speaker 1: they fixed a lot some of a lot of these issues.
Speaker 1: There are there are still some, but more importantly, they
Speaker 1: seem to have been looking to fix coal prices significantly higher,
Speaker 1: so that renewables it can be very competitive, you know,
Speaker 1: without any subsidies whatsoever, and will be actually the preferred
Speaker 1: source of power dispatch. So I think the next couple
Speaker 1: of years are going to be will quiet will surprise
Speaker 1: people how much they will built in terms of renewables,
Speaker 1: because the market incentive is now very strong. Um, if
Speaker 1: you think simplistically, if there seems to be fixing coal
Speaker 1: contracts around seven hundred remitives, so it's under the ten
Speaker 1: U s dollars plus minus, there's about the third of
Speaker 1: a ton of coal that goes to make a you know,
Speaker 1: maybe what are a power There are lots and lots
Speaker 1: of renewable projects which will make money world below thirty
Speaker 1: dollars in China, and that will that's see ess secual.
Speaker 1: If you're a coal plan, you can't uncover with fuel
Speaker 1: costs for that kind of competition. So I think they
Speaker 1: have started to get the market design right in all fairness.
Speaker 1: In terms of their motivations, I think a lot of
Speaker 1: this is driven by guessing more tough look on their
Speaker 1: foreign policy and security environment, and there are realistic considerations
Speaker 1: that if you need to import a couple hundred million
Speaker 1: tons of your coastal provinces and you can't building vatteries
Speaker 1: more than thirty days there, and you have a marine
Speaker 1: conflict in your local neighborhood and you can't get a
Speaker 1: merchant marine through, then your power grid goes down in
Speaker 1: less than a month. That's obviously something they can't really
Speaker 1: tolerate given some of their ambitions in the region. So
Speaker 1: I think there is a strong security angle too, some
Speaker 1: of their new religion around decompanization. So who loses big
Speaker 1: picture as the decourbanization effort continue and make serious progress
Speaker 1: and greater production of renewables and or nuclear domestically, who
Speaker 1: ultimately loses out from their ship. Sure, I mean right now,
Speaker 1: there's part of the reason the coal markets so strong
Speaker 1: is to do a lot of supply interruptions in Indonesia
Speaker 1: and China also had to buy a lot of coal
Speaker 1: influence very quickly at the end of last year. Longer term,
Speaker 1: it's very bad for the major coal explorers which are
Speaker 1: to China, which are Indonesia, principally Australia, which does not
Speaker 1: as China has banned from exporting coal to them due
Speaker 1: to diplomatic fracas and so forth. There will be major
Speaker 1: loses from the shrunken thermal coal market. It's simpl and shipping.
Speaker 1: But for met coal, which goes into steel, which is
Speaker 1: a different sort of thing, it's really will be the
Speaker 1: big loser there. But also Russia in the US, and
Speaker 1: I mean the only reason the met coal market is
Speaker 1: very strong right now is because China's buying most of
Speaker 1: its met cold from Mongolia in Antane. But due to
Speaker 1: closing the border to to COVID Piven and substantially closed,
Speaker 1: that's led to this explosion of call exports from Russia
Speaker 1: and Canada and the US to China to replace the
Speaker 1: fact that they kicked out Australia the close the border
Speaker 1: with Mongola, and they happened to buy a very expensive
Speaker 1: call from a very long way. Why now, you mentioned
Speaker 1: incentives and the idea that energy producers are very much
Speaker 1: incentivized to shift to renewables in the current market. But
Speaker 1: one thing we saw last year when coal prices were
Speaker 1: actually spiking was China liberalized its market, and I think
Speaker 1: it said it would allow prices to rise something like
Speaker 1: in order to incentivize more power production, and I think
Speaker 1: it was something like ten before. So I'm wondering how
Speaker 1: significant is that shift. Is that a permanent liberalization of
Speaker 1: the market in order to encourage more energy production or
Speaker 1: is it more of a one time thing to try
Speaker 1: to balance out the market immediately. Well, what happened was
Speaker 1: in September that the coal price got so high. I
Speaker 1: think if at one point got to the futures and
Speaker 1: Juno got to like two thousand women be a time.
Speaker 1: Plus the power plants, which were obliged to produce but
Speaker 1: could not get prices above a certain level and cover
Speaker 1: their fuel costs just said it was I need to
Speaker 1: do some plan maintenance or oh no, someone turned off
Speaker 1: the machines, and so you have these rolling blackouts because
Speaker 1: there until these were just electing to not produce at
Speaker 1: the loss. And so they've made all these adjustments to
Speaker 1: maximum coal price and then fuel costs passed through to
Speaker 1: enable the market to kind of functioning it and that
Speaker 1: seems to be working okay for now. It's there's a
Speaker 1: reasonably why band. So it's funny to saturday the side
Speaker 1: and under normal circumstances that should be automatical to ensure
Speaker 1: that people are risen price signals. But yeah, there was
Speaker 1: just absolutely patterns attempted to October. I mentioned this at
Speaker 1: the beginning of just out of curiosity, has the really
Speaker 1: has is short term policy been affected by the upcoming Olympics.
Speaker 1: I know there's always talk about you know, blue skies
Speaker 1: or the goal of having a good air air quality
Speaker 1: ahead of big events. Is that affecting current market conditions
Speaker 1: at all? So there's two ways to night steel. One
Speaker 1: is with a blast fus we use a lot of
Speaker 1: cooking call and and firm and use the more called
Speaker 1: the beat and the otherwise an electrical funence. We you
Speaker 1: just use cooking call and electricit. Electrical fences are generally smaller,
Speaker 1: noisy ends, night less emissions and so for example, the
Speaker 1: floor the Olympics. Let me telling everyone to stop stuck
Speaker 1: up their thermal calls. They can produce electric power around
Speaker 1: the electric car bonuses and absolutely everyone to take maintenance,
Speaker 1: stays off, not use glass, oxygen furnuss to get to
Speaker 1: have blue skies and so forth. I think there's going
Speaker 1: to be extended time off the factories around which is
Speaker 1: the problems that surrounds Beijing, to ensure that they have
Speaker 1: the desired scenery and background. It's not not the first
Speaker 1: time they've done I saw them do them two night,
Speaker 1: that they'll do it again this time. It's it's it's
Speaker 1: somewhat principal. So we started this conversation talking about the
Speaker 1: supply chain of energy and the idea that one disruption
Speaker 1: in China can have a knock on effect to European prices.
Speaker 1: So I'm wondering, we've already seen Chinese or we've already
Speaker 1: seen prices for China coles start to come down. And
Speaker 1: you talk about some projects to build up capacity, specifically
Speaker 1: that Big Mind in Mongolia and a lot of of
Speaker 1: the renewable project. At what point does capacity get built
Speaker 1: out enough that it starts to ripple back through the
Speaker 1: europe Pan market and prices start to come down there. Well,
Speaker 1: it's it's interesting. I mean just recently, and I think
Speaker 1: we're speaking towards the end of January middle light January,
Speaker 1: China's already turned around and said they will start selling
Speaker 1: ellen cargo's back into the market, and that's already taking
Speaker 1: down European gas prices and the relevant ellenjy spot and
Speaker 1: slop markets quite sharply over the last couple of days.
Speaker 1: We will probably continue to do so. So that's already happening.
Speaker 1: Like sable and thermal markets are still reasonably tight. Do
Speaker 1: you do disruptions in Indonesia, which is ironically due to
Speaker 1: intensified rainfall from since the climate change driven So I
Speaker 1: think we will start to see things normalizing as we
Speaker 1: get towards the end of the year. China will have
Speaker 1: very high in ventures that will not the aggressive buyers
Speaker 1: of sake and call and Indonesia. I assume slightly more
Speaker 1: normal weather patterns as a landin you awakends and then
Speaker 1: they'll be up to produced more. So there's this sort
Speaker 1: of driver of the energy, this sort of this energy
Speaker 1: super spike does seem to be settling down quite sharply.
Speaker 1: Is this the is the super spike that we've seen
Speaker 1: this year in Europe? Was this sort of you know,
Speaker 1: as you said, was it kind of a one off
Speaker 1: fluke or is this something that due to structural factors
Speaker 1: that will take a while to ameliorate, could see um
Speaker 1: a recurring winter phenomenon going forward. I think this was
Speaker 1: this is a one off. I doubt China will have
Speaker 1: issues that's call market quite as acute as they had
Speaker 1: last year because it was tied up with anti corruption campaigns, inspections,
Speaker 1: and a bunch of things which are not market driven
Speaker 1: outside but to impact market. So I don't think that
Speaker 1: will occur again. They do appear to be happening more
Speaker 1: cocular policies around what adventures people should hold, so we
Speaker 1: don't get situations where things get that despered again. Um.
Speaker 1: And then they have partially liberalized their power markets that
Speaker 1: should give a long term signal. So I think Shina
Speaker 1: is less likely to be a ground zero for large
Speaker 1: shocks that propagate out through energy markets. On the other hand,
Speaker 1: it's so big that even minor shocks in China can
Speaker 1: feel very big elsewhere, especially if markets are generally tied otherwise.
Speaker 1: So one thing or let me just think how to
Speaker 1: phrase this. So I saw you tweeting late last year,
Speaker 1: and this was still when coal prices were spiking quite
Speaker 1: a bit, and you are basically saying everyone is about
Speaker 1: to get shocked because prices are going to start coming
Speaker 1: down very soon. What was it that you were seeing
Speaker 1: in the market that perhaps others weren't seeing at that time?
Speaker 1: Because you did turn out to be right, and of
Speaker 1: course we have seen coal prices ease since then. There's
Speaker 1: a lot of very niche data you can get. This
Speaker 1: is from the Chinese railways and so forth, so you
Speaker 1: can get data on how much coal has been loaded
Speaker 1: in these large railheads near Minds in Mongolia and in
Speaker 1: Shantasy in Shantasy, and then you can sort of get
Speaker 1: the the number of trains loaded and can start to
Speaker 1: see the like a tidalway. You can sort of start
Speaker 1: to see the you know, the word of sucking back
Speaker 1: from the beach before it kind of gets blows it
Speaker 1: out away. But that's what you can say, and you
Speaker 1: can you can get out of daily frequency. So once
Speaker 1: that supply response really started to happen with the Minds
Speaker 1: and then they started to essentially started all the rail
Speaker 1: cars out from Chinese ports, northern ports up to the mines.
Speaker 1: You knew something was coming. And even normally when the
Speaker 1: Chinese government puts out another points bullets and to make
Speaker 1: something happen, it's normally pretty safe. Bet of all happen.
Speaker 1: Let's just short. But the size of the response I
Speaker 1: think was quash shopping to a table obviously, like higher
Speaker 1: commodity prices, higher energy prices, inflation, higher transport costs, inflation
Speaker 1: more broadly around the world, Like, it does feel like
Speaker 1: there's a lot of temporary or transitory factors driving it.
Speaker 1: I know we're not like supposed to use that word anymore,
Speaker 1: and I know that that there's more to life than
Speaker 1: like what's happening in the Chinese coal market. But when
Speaker 1: you think about, like how you know the idiosyncratic factors
Speaker 1: happening in the Chinese coal market, the way that and
Speaker 1: I loved your analogy of a large adult jumping on
Speaker 1: a trampoline with a bunch of little kids, uh, the
Speaker 1: way that filtered into European prices, the way that European
Speaker 1: energy prices have filtered into fertilizer prices, the way fertilizer
Speaker 1: prices feud food prices, and so forth, it's hard like
Speaker 1: not to sort of feel like, yeah, there really are
Speaker 1: a lot of transitory factors. I don't know whether like
Speaker 1: inflation totally normal, but a bunch of weird stuff has
Speaker 1: gone on. I think so. But I think one thing
Speaker 1: that's also interesting with cal and China in particular, when
Speaker 1: they the prices got off to two thousand women be
Speaker 1: a time for thermal which is just absolutely bananas. But
Speaker 1: then it was quite shocking the people as China came
Speaker 1: out and said no, i'll we want a long term
Speaker 1: time to contract price of you know, seven d women
Speaker 1: be a time which people are shocked by because because
Speaker 1: you know, pre COVID was five And I think, what
Speaker 1: what China is doing there, which is quite shrewd, is it?
Speaker 1: In all the craziness and inflationary impulsible these disruptions, China
Speaker 1: is using this opportunity to force a re pricing of
Speaker 1: fossil energy and China through to industry and then has
Speaker 1: big impacts because when you smelled a ton of aluminium um,
Speaker 1: you need about eleven megaworks do that, and so that's
Speaker 1: eleven times having a fifty womanty. You know, it's like
Speaker 1: pushing on the price of element in the new order
Speaker 1: of fifty bucks. They're sort of pushing through these kind
Speaker 1: of policy driven re pricings because I do want um space,
Speaker 1: colbon transition and change incentives around um consumption of very
Speaker 1: energy intensive products to a certain extent. On the other hand,
Speaker 1: they've got it, They've got the social stability and maintaining
Speaker 1: sort of you know, employment, all the other objectives they have.
Speaker 1: But there is a sign that they're kind of willing
Speaker 1: to take a bit more pain than they were last
Speaker 1: time on some of these cost changes. So there are
Speaker 1: some fundamental changes here, and you know, there's sort of
Speaker 1: China putting a bit of a floor under the price
Speaker 1: of coal and therefore the under the price of other
Speaker 1: commodity production that are not just going to revert to
Speaker 1: pre COVID level sort of a de facto or implicit
Speaker 1: like carbon tex the way economists in Europe and the
Speaker 1: US proposed. And you are saying that comfort like you
Speaker 1: talk to companies like Shahua, which is like Shina's biggest
Speaker 1: color mine. I asked the intent and you guys can
Speaker 1: try to under renewables or something that I've never paid
Speaker 1: myself sidies on time. The term business and you know,
Speaker 1: thank you, And now that they're just announced, they're going
Speaker 1: to be revealable. So essentially the policy signals and they
Speaker 1: sort of will of the party state is to get
Speaker 1: things done in this area. Now, whether they can tolerate
Speaker 1: slow down in real estate and other considerations to be seen.
Speaker 1: But in other ways, this is there are signs of
Speaker 1: them being more serious than they've been quite some time.
Speaker 1: All right, Alex, that was a fantastic discussion and a
Speaker 1: really good round up of what's going on in the
Speaker 1: space and drawing the connections between China and Europe. So
Speaker 1: thank you so much for coming on all thoughts. Thank
Speaker 1: you so much, guys, really inga that was great. Thanks
Speaker 1: for so Joe. I obviously thought that was a very
Speaker 1: interesting conversation. One of the things that struck me was
Speaker 1: I think energy might be one of the few places
Speaker 1: where there's actually policy agreement between China and Europe. So
Speaker 1: Europe wants energy prices to come down, China wants to
Speaker 1: build out its energy efficiency and self sufficiency, and sort
Speaker 1: of going back to that trampoline analogy, you know, the
Speaker 1: kids want the adult to get their own trampoline, I guess,
Speaker 1: and the adult wants their own trampoline too, So you know,
Speaker 1: if both of those parties are aligned, it seems like
Speaker 1: at some point that could happen. One thing that I've
Speaker 1: always liked about Alex's work and research and just following
Speaker 1: his stuff and talking to him over many years is
Speaker 1: the granular level of detail that he knows about all
Speaker 1: these different industrial process whether it's like how much it
Speaker 1: costs to make steel and the various the electricity budget
Speaker 1: for steel or aluminum. And obviously he talked about how
Speaker 1: he was able to sort of anticipate the move in
Speaker 1: by looking at railroadings. There's a deep granularity. I guess,
Speaker 1: like if you know you're talking about if you're going
Speaker 1: to be working in the business of buying of distressed
Speaker 1: assets of industrial or commodity related companies, you really have
Speaker 1: to know, like nuts and bolts, what the value uh
Speaker 1: and what the potential recovery you know, I guess I
Speaker 1: would like to understand recovery values of these assets. You
Speaker 1: really have to know like the various input costs of
Speaker 1: what you can get out of them. Yeah, it definitely
Speaker 1: seems like that's the case. The other thing that I
Speaker 1: was thinking about is, I guess all eyes on Mongolia
Speaker 1: and China relations for the foreseeable future, because it also
Speaker 1: seems like that's a dynamic where it does have the
Speaker 1: potential to impact the energy space quite significantly. Absolutely, But
Speaker 1: and I'm really glad like the point that he made
Speaker 1: at the end. It's like, Okay, so coal prices went nuts,
Speaker 1: and obviously China needed to make changes to address that.
Speaker 1: But the idea that like they really don't want to
Speaker 1: or at least at the moment, they don't want to
Speaker 1: go back to the pre crisis cheap prices, and that
Speaker 1: this is an opportunity for transition, and so setting this
Speaker 1: floor is really interesting and I definitely think listeners, hopefully
Speaker 1: if they haven't, need to go back and listen to
Speaker 1: the episode that we just recorded with Travis Lundie, because
Speaker 1: I hadn't thought about that really at all, although of
Speaker 1: course it makes sense that it's part and parcel of
Speaker 1: the same thing, Like there's if you want to have
Speaker 1: a more sustainable energy budget, part of it might involve changing, um,
Speaker 1: the pace of real estate development. Yeah, it's interesting how
Speaker 1: those two seem to fit together. And you're right, I
Speaker 1: haven't thought about that before. In any case, lots going
Speaker 1: on in China and the Chinese economy. Should we leave
Speaker 1: it there? Let's leave it there? All right? This has
Speaker 1: been another episode of the Odd Loots Podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Why Isn't Though. You can follow me on
Speaker 1: Twitter at the Stalwart. Follow our guest Alex Turnball. He's
Speaker 1: at Alex B. H. Turnbull. Follow our producer Laura Carlson
Speaker 1: at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesca Levie at Francesca Today. And check out all of
Speaker 1: our podcasts in Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening.