By Greg Peel
Energy intensity is defined as the number of units of energy required to produce one unit of GDP. Perhaps the best correlation is to think of a car's "miles per gallon" efficiency of fuel consumption. From the 1970s to now, big improvements have been made in the fuel efficiency (or energy intensity) of cars. As fears of global warming have grown, and the price of oil has soared, accelerated strides in fuel consumption have been made more recently.
As China was emerging from its cave in the late twentieth century, it did so with the legacy of inefficient, energy-intense heavy industry, dating back to the Maoist era of rampant steel production at any cost. However, between the 1980s and 2000 China was able to reduce its energy intensity by two-thirds, at the rate of about 4% per year, largely because it stopped producing unnecessary steel and turned its attention to a "light" export industry - the original era of "Made in China".
History has now recorded how China then swung back from simply exporting toys and other cheap knick-knacks into developing a booming export economy, which once again required the heavy industry inputs of steel making, aluminium smelting and so on. Pretty soon Maoist steel production looked minimal by comparison, and China hurtled into surging economic growth, unwilling to consider energy intensity as a problem lest measures taken derail the locomotive.
Between 2003 and 2007 not only did China's energy consumption snowball (from an average of 4.6% growth in 1982-2002 to 11.9% growth in 2003-07), but its energy intensity also increased by 10%. Thus every 100 units of GDP growth represented a 110 unit increase in energy demand, and GDP growth hit 12%. By 2006 China began to recognise it had a problem once more, and was also coming under pressure from the Kyoto stalemate. So the government introduced policies and targets in a typical softly-softly approach to easing a problem while not upsetting the economic applecart. Suffice to say, no improvements were made in energy intensity.
Laissez-faire was soon to turn concern, however. China quickly became so polluted there was a threat its economy could come to a standstill. Potable water was becoming scarce. Beijing had disappeared behind a permanent shroud of smog. And Beijing was due to host the Olympics. Then early in 2008 heavy snowfalls shut-down much of China's power generation. But the snow only masked the fact that China's old coal-burning power stations were now shown to be highly inefficient. The government had already moved to rectify the situation, and the snow only pressed home the point.
Financial markets, note the analysts at GaveKal, have priced in extremely high rates of primary energy consumption by China. "They may be in for a rude shock in a year or two," the analysts glibly predict. China has recently been on an all-out efficiency drive. Growth in primary energy consumption has fallen from 11.9% to 9.6% in 2006 and 7.8% in 2007. The contributor is reduced energy intensity, which fell by 1.8% in 06 and 3.7% in 07.
The government's target is for intensity to fall by another 15% by 2010.
Can this be achieved? Well consider that during China's remarkable economic growth period the country was exporting deflation to the rest of the world, mostly as a result of a huge low-paid workforce. This deflation offset the inflation caused by China's incredible commodity demand. But as time moved on wages rose, the renminbi was revalued against the US dollar, and marginal Chinese export industries went to the wall. With the government now trying to put the brakes on, rationalisation occurred and the deflationary forces ceased. Now China has 8% inflation why the rest of us worry about 4-5%. China has a major inflation problem.
Reducing energy intensity, and thus energy consumption, is one way to fight inflation, let alone pollution. Thus Chinese industry has been "dragooned", as GaveKal puts it, into a program of strict energy consumption reduction targets. This is being controlled by placing higher energy consumption tariffs on the most energy-intense industries. One result is that inefficient old coal-burning electric power generators are being replaced by new, more efficient models.
The 200% increases in coal prices in 2008 reflected China's immediate coal demand in a time of production shortfalls (which included Australia's weather problems). But at the same time, China's coal intensity per unit of GDP output fell 11.5% in 2007, reflecting efficiencies achieved.
Hold China's GDP growth steady, and ongoing efficiencies will reduce Chinese demand for coal for the same output. Reduce China's GDP growth, and there is a double-whammy effect. Increase global coal production - and what exporter country is not trying to do that right now? - and there is a triple-whammy effect.
If Chinese GDP growth falls from 12% to 9% in 2009-10, as seems to be the current prediction, and the 2010 energy intensity reduction target is met, GaveKal calculates China's annual energy consumption growth will plummet to just 1.8% by 2010. The impact will be much greater on coal, being 65% of China's energy consumption, than oil, which is also being driven by the rise of the Chinese motorist.
It is quite possible that current Chinese coal shortages will disappear, notes GaveKal, as more efficient power plants cut their requirements and more supply comes on stream. Ongoing bullish forecasts among analysts for the price of coal is predicated on increased Chinese demand.
