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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.

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