Tuesday, 19 July 2011

Vietnam: China's coal lessons

The question of coal imports spotlights the dif­ficulties of Vietnam's energy pricing structure and the limits it is causing in the growth of energy and the timing of liberalisations in the energy sector.

China is currently facing similar constraints in its electricity, and the Chinese case shows that the liberalisation of markets, especially miner­als and electricity, needs to be carried out in a coordinated way.

China is currently suffering an electricity crisis due to its continued control of electricity pricing in the domestic and industrial markets and its reliance on coal for electricity production.

China relies on coal for 73 per cent of its electricity production and the price of coal has been steadily rising as demand for electricity has grown in manufacturing, industry, and the consumer market.

Yet while coal prices are allowed to increase in line with domestic and import costs, electricity producers are forced to keep their prices in line with government guidelines. Electricity genera­tors are losing money as input prices rise and retail prices remain steady.

Electricity generators and utility companies, the majority of which are state owned, are growing very unhappy. Many have decided to cut pro­duction rather than continue to incur losses.

This is affecting industry across China as factories are forced to cut production due to brownouts and blackouts. And commodity mar­kets as far away as Australia are suffering from a downturn in demand for natural resources such as coal, copper, and tin used in China's manufac­turing industry.

The obvious lesson is that the Vietnamese government should be careful how it introduces competition into the electricity market and should ensure that input markets move at the same time. Input suppliers and producers can suffer losses for only so long and as demand for electricity grows so will the strength of partici­pants in the electricity sector.

For more news and expert analysis about Vietnam, please see Vietnam Focus.

© 2011 Menas Associates

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