Odd Lots - China Is Changing Its Coal Use, and It Affects the Whole World

Episode Date: January 31, 2022

Over the last several months, Europe has seen its power costs soar. There are many drivers of it, but one factor has been a shift in Chinese energy consumption. While China has plenty of domestic coal resources, from time to time it imports quite a bit, depending on transportation costs. This can have major ramifications for prices outside of its borders. Meanwhile, China is undergoing a meaningful change to move off of coal and rely more on renewables and nuclear power. To help us understand what it means, we speak with Alex Turnbull, the author of a new paper on Chinese goal use, to break down what happened, and where it's going.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthall. So, Joe, we've been talking quite a bit about supply chains. That's correct. For now, like pretty much like well over a year. But yes, absolutely. It's not going away. Yeah, that's probably an understatement. So one of the things we have definitely learned over the past year or so is that when one part of the global supply chain, I guess, flaps its wings or experiences a disruption or whatever, it tends to ripple through a bunch of other things. And I think that's arguably what we've seen with energy prices and with the big surge in prices over the past few months.

Yeah, I think like commodities and of course commodities are very sort of hard. you can't delink them from global industrial processes and supply chains in general. Like it feels like when we talk commodities that it's like, A, there is a very high level of demand. The GDP around the world growing very fast, particularly as economies return to trend or in some cases maybe even overshoot the previous trend. And then there is also these sort of idiosyncratic factors that pop up that are not really macro. Maybe it's related to weather. maybe it's related to environmental changes that inhibit production. Maybe it's sort of something else.

And it's like that policy. So it's like that combination of very tight, very strong demand. And then any ripple or any speed bump anywhere or any change on the supply side really gets magnified. Yeah. So this was something that Jeff Curry at Goldman Sachs brought up on one of our episodes last year. When we were discussing high energy prices and the commodities rally, he, I think, he said that actually what was happening in European gas actually began with a coal shortage in China. So there wasn't enough coal in China and they had to find a substitute energy source and what they found was oil and gas and that eventually fed through into European prices.

So I guess what I'm saying is, if you think of China coal as ground zero for higher energy prices that rippled throughout the world, it seems like we should dig into that. Yes, I'm very curious what's going on with China and energy because there's lots of different things happening at once. There's the Olympics coming up. There's domestic policy changes, which we've talked about quite a bit. There's long-term goals on changing the energy mix. I don't feel like I have much insight into it other than that is extremely important beyond China's borders. So yes, we need to dig in further. Okay. Well, I am pleased to say that we are going to do exactly that. we have Alex Turnbull, a fund manager based in Singapore, and someone who has done quite a bit of research into China's coal market. So Alex, welcome to the show. Thank you very much.

So I guess my first question, just to lay the groundwork for this discussion, one of the unusual things about the China coal market, as I understand it, is that China does actually have a decent amount of coal within its borders, but it also imports a lot of its coal supplies. So I guess my question is, why does that happen? Why do they do that? Why not just dig up what they have already? Sure. With any commodity, which is reasonably low dollar value per ton, it's best to think of it as not a price where if you want to buy an ounce of gold from someone, it's sufficiently high value. they can mail it to you or export it quite easily. With things that are relatively low value per time,

transport costs are incredibly important, and locational constraints are very important. So it's a little bit like gas pipelines where just because someone wants to buy gas somewhere doesn't mean you can actually deliver it to them or deliver it to them in an economical price. So with coal, it's really these locational dynamics that make it quite a quirky market in some respects.

Just like 90 seconds into this discussion, I'm already finding that to be like very useful. So I want to step back and ask even zoom out even further before we get into the details. But it's in your research, like outside of China specifically, why is this a question or why is this a topic that interests you? And why should say anyone outside of China care that much? Sure. So my background is in distressed debt historically and convertible bonds. And the coal sector repeatedly blew up over the course of the financial crisis. A few names got into trouble. There was a large protracted downturn in 2015-16. And over that period, 2015-17, I simultaneously worked on Peabody Energy, which went bankrupt and also Mongolian.

in mining, which also went bankrupt around the same time, or had to be restructured. And so by seeing how those two businesses were actually quite tightly coupled in weird ways by the Chinese coal market and the quirks within the Chinese coal market and regulatory actions there over time, this is essentially the biggest energy market in the world. It's almost a quarter of the world's carbon emissions, just coal and China. And it's reasonably poorly covered and understood. So in the course of tweeting about this in, I think it was mid-2020, I got a reply back from a friend who's a professor of the Australian National University who said, what's all this about? And then we spoke about it for an hour or so. He said, why don't we do a paper about this?

And I thought, well, we can probably get the data or at least we can try. And so hence we went through this exercise of modeling the entire Chinese logistics, power and steel market, transport and the mines and the imports in a big simulation. So maybe we should get into what has actually been happening with the coal market in China. And, you know, I'm looking at a chart of prices and there was that spike late last year, sort of at the beginning of the fourth quarter, I guess. And it started coming down since then. So what exactly happened, I guess?

What was the shock to China's coal system that set that price action in motion, this price volatility? Sure. So thermal coal, you had a similar problem to a lot of other commodities in 2020 where demand collapsed. There was supply continued. And while coal did not trade at negative prices like oil, it was pretty egregiously oversupplied. At the same time, there were weather dynamics. So in the Chinese power market, the second biggest source of power is hydroelectric power.

So if you get a lot of rain or a very wet summer and spring in China, you then suddenly have a lot of cheap hydro power, which then displaces coal. So by Q4 2020, they were just about giving it away. But then there was a cold winter. And then over the course of, say, March to May, one key coal mining province massively underproduced to the tune of output was down 30%. And at the same time, demand was recovering, like in a lot of other places in the world.

You had a real upswing in power demand. And then by September 2021, there were, I think in Guangdong, on the date of we have, they had less than six or seven days of coal inventory to burn. So if there was a typhoon that came through Hong Kong and the ports got shut for a couple of days, that would have been lights out in Guangdong. and prices, of course, were flying at that point.

Then the government stepped in, told everyone to turn the mines back on in Mongolia, and now looks quite well supplied again. But it's been quite a roller coaster, I would say. In general, what is the mix look like in terms of how much coal powers the Chinese economy, how much is domestic versus imported? And then also, like, what is the goal? because China aspires to, like many other countries, reduce its use of coal for environmental reasons and so forth.

Like, what are the ambitions? So China's the world's biggest coal consumer by quite a large margin. Consumes about 3.5 billion tons per year of thermal coal. Two billion tons goes into power. The rest goes into a bunch of industries, cement, and so forth. And they import, in general, for thermal coal somewhere between, 200 and 300 million tons a year. But that can be quite volatile.

And most of that is imported into southern provinces like Fujian, Guangdong, and Guangxi, which don't have their own coal mines and which are actually quite a long way from where China's coal mines are, you know, in the interior of the country, in Shanshee and in Mongolia. And so China's currently trying to achieve two major objectives.

One is to have a stable energy supply and some semblance of order within its power market, which is entirely understandable, and also reduce its carbon emissions, which is also very understandable. But the question is, given most of its coal, actually goes into either directly or indirectly, into heavy industry, which is very heavily driven by real estate demand, can they manage a real estate slowdown or a change in growth model? So if you think about it, their carbon objectives, the energy security objectives, and their financial rebalancing objectives are all these incredibly tightly coupled systems.

And they're kind of the same system in many regards when you do the carbon account. That's really interesting. So one thing I was wondering just on the policy front, so we did see China shut down quite a few mines and specifically the older, dirtier mines. I guess how easy are those to turn back on or how flexible is new supply in terms of bringing additional capacity on stream? So, well, when they initially had a big clean out of the sector in 2015 and 16, they did shut down a lot of smaller private miners, which had a reputation for not being very compliant

with safety standards or being well capitalized. then coal prices got a bit high and in 2018-19 they increased their CAPEX for coal mining and they told the largest players to build bigger, more efficient, more mechanized mines. And so when things slowed down in Q2 of 21, that happened quite abruptly and was quite a surprise to market participants. No one could really explain why that was happening as demand was going up. So it subsequently emerged later. But then it was actually very easy to turn that all back on because they're all very centralized state of enterprises. So as soon as they put the memo out for everyone to mind more,

get that on trains and get it out, you saw daily coal output explode. They actually had quite a lot of control when push cam to show up on the market. This is Tom Keene, inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney.

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Search for Bloomberg surveillance on Apple, Spotify, YouTube, or anywhere else you listen. On the East Coast, listen at lunch. And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney, and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, Essential Listening, each and every business day. I'm sorry, can you go back and maybe talk a little bit further about the way these various policy priorities dovetail with each other? And we actually just did an episode on the real estate sector and the attempt to transition.

some of the quality of GDP growth in China away from real estate speculation and real estate development, and then the broader decarbonization. Can you talk a little bit about further, about the common thread there and how coal itself sort of fits into all of it? So most of China's energy demand, or least electrical power demand, actually comes from heavy industry. And the biggest heavy industries are in order of repair, are ferrous metals, which is basically steel, non-ferrous metals, so things like copper and zinc and aluminum, and then petrochemicals and then cement. When you do the flow of materials, so you track where does all the steel go, actually very heavily goes into construction,

where do the emissions from steel come from, it's all electrical power and coal for smelting steel. You see that essentially the Chinese real estate sector accounts for, in the order of, say, 40% of China's total emissions. Depends on whose accounting you're looking at. But it's enormous. And then heavy industry, and that's just residential and there's commercial and the rest of it. And so heavy industry

accounts for 67% on the latest data of China's power demand. So, and then Chinese domestic construction in general is what drives China's emissions more than anything else. Essentially, if you want to reduce your carbon emissions,

and improve your energy security by importing less coal. You can build less apartments, you can build a lot of renewables to replace the coal, or a bit of both. But these two functions are very tightly integrated. You know, it's always been an observation when people do modelling that if China were to get through real estate construction rate more in line with global norms, it would be very easy for China to achieve quite remarkable carbon targets

but it's proven very hard for China to change its growth model and move from an over-construction paradigm in real estate and certainly residential real estate. So, I mean, assuming that China is at some point able to make some progress in changing the mix of its growth and we do see house prices start to come down, well, we've already seen Chinese house prices start to come down, and maybe housing inventory starts to be cut and we don't get as much construction of new homes assuming all of that happens, what happens in the energy space in terms of funding and capital? Is capital going to be an issue for Chinese energy, or does all of that come from the state?

It's very heavily state-owned, so they essentially have access to if government policy is that they are to build certain things, then there will be capital available for them to build certain things is the best way to think about it. It's not like the NDRC signs off on every single lot among the Cappex plans, but there's a unity of vision there on. Let's go back to like the, the effect outside of China's borders and the other thing. You know, we've seen the sort of knock-on effect. We've seen surging energy prices in Europe. It's been a very stressful winter, massive surge in electricity bills. Not only does that hit the household sector there. It's also hit some industrial sectors, fertilizer companies shutting down or temporarily because it just doesn't

make sense. They can't be run economically at these levels. We started this discussion talking about the ripple effects. And so what are the ripple effects from China and how do they relate to what we're seeing elsewhere in the world? Sure. So the challenge for China is that if China has a shortage in energy, a province in Mongolia has an anti-corruption campaign and my approvals don't happen or there's some hold up in production. The problem is that if China then needs to import a large amount of coal very quickly to short notice, it's very hard for China now to source that kind of volume of coal that it needs from the international market. The reason it is is that China consumes three billion tons a year. So the thermal between power,

cement and heating, and then the US consumed 600 euro. So it's like five times the size of the United States, and India is about the same, the slightly small than the US. So it sort of swamps any viable supply that it might get from elsewhere if they have a significant shortage in China. And so then what you saw in China was that as coal prices rose,

they were switching from burning coal to get, like electricity to gas. So it's somewhere China started buying a lot of cargoes of LNG. And you saw that in the shipping data just exploded over the summer. And so actually from May onwards when the inventory started to get low. And so, and that, of course, tightened the gas markets at a time when Europe is normally building inventories into winter and led to partners. One of the contributing factors to very tight gas markets over this winter.

So the problem is China is essentially it's like having an adult on a trampoline with small children. It just is so big now. It can kind of launch other markets without even trying to. So what happens when China actually builds out its energy independence or security? Because this is something that we've seen explicitly as a policy goal. They want to reduce imports. They want to rely more on mining. within their borders, what happens to that ripple effect?

If they manage to succeed in doing that, does that ripple effect start to come down? Or is it just so big that it's really difficult to reduce it? I think the challenge with coal is that China burns about six million tons a day, six and a half million tons of day during winter. Coal's got about the same density as water. So, you know, one cubic meter of war is a ton. And so you think of what that means and ship volumes. If you want to store that much coal, you know, you can literally see this from space quite happily.

And many commodity traders do. And so the problem is that China is now trying to enforce inventory levels on coal mines and power plants. And that can work up to a certain point. But realistically, it will have to either gradually... So it becomes slightly less energy intensive, or significantly less energy intensive through a changing growth model, all have to move to sources of power, which, where it's a bit easy to manage your flow of energies. That's built a lot more renewables and having a lot of hydropower and pumped hydrower storage or a lot of nuclear. And from the latest energy plan, it looks like they'll be building a lot of nuclear, and that will be actually in those coastal provinces, which are the, you know, international coal and porting provinces. so Guangdong, Bhutan, Jhajiang, and Guangxi.

So I think over time, they will essentially exit cold markets, so that is certainly their intent and become more self-sufficient. But I don't think it's, I think trying to manage these inventories. To try to stay very heavily fossil-oriented when they're simply consuming this notch is very challenging. You know, I'm thinking one of the storylines out of Europe, and again, and I need to talk about it more, especially because it has long-term ramifications for the energy transition, is like this perception that Europe has tried to transition to renewables maybe too fast, in the case of Germany, still shutting down nuclear, not maintaining like a robust base load, even as it transitions. Does China's attempt to transition long-term off-call?

And you mentioned that it's going to be investing more in nuclear. Is that going to allow it to, like, achieve those goals, to achieve the decarbonization goals while also not running into short-term volatility, not running into a mismatch? And is nuclear an important part of making a transition sustainable? I think nuclear is very important for those southern provinces where you don't have great solar resources or that particularly good wind resources. So you're sort of out to two on that count. Limited hydro and you want to reduce your coal influx.

There's not really, by process of elimination, that's probably the way they'll go. And that's certainly what's coming out of their energy plans. I think for Europe, there's a, it's sort of the, what the problem with power price variation is not day to day. It's the seasonal storage. So it's how do you store up the energy you need for winter in summer? And normally you do that through a, you know, hydropower or through just, you know, storing, running your gas storage up to, you know, 90%.

And then running it down to 50% as they do normally in Europe around February and March. But if you have a try to lift in all the spot LNG cargoes for their own reasons, and then Vladimir Putin has other plans, then that kind of runs into trouble. So it's not, the variability of renewables tends to be like you're not sure that it's going to be on or off. and you give them one hour period, but over the course of a week, it's reasonably predictable, especially if it's a blend of solar and wind. But what you can't really hedge is how do you build up massive storage over the summer and then keep it for a window, like a squirrel, basically. So can I ask a really basic question on the renewable energy front,

which is there was always suspicion about how serious China actually is when it comes to decarbonization, as in is it actually going to meet the quite lofty goals that it's set out for itself? And so I guess my question is, one, how serious are they on the green energy front and decarbonization? And two, why decarbonization at all? Why is it important to them? Is it genuinely a climate concern or is it more about efficiency and building out that self-sufficiency when it comes to energy security? Well, I think historically that power regulations, until quite recently, did not, were not particularly

coherent. And I would say the incentives for utilities to take renewable power, like in 2016, the level of curtailment, essentially when farms and produce power and they're not able to sell the market, it was very high. And there were a lot of market design issues. I think what they've done recently is they've fixed a lot of those issues that are there are still some. But more importantly, they seem to be looking to fix coal prices significantly higher

so that renewables, they can be very competitive, you know, without any subsidies whatsoever and will be actually the preferred source of power dispatch. So I think the next couple of years are going to be, will surprise people how much they will build in terms of renewables, because the market incentives now are very strong. If you think simplistically, if there seem to be fixing coal, contracts around 700 remedy, so it's 110 US dollars plus minus. There's about a third of a ton of coal that go to make a, you know, megawatt hour of power. There are lots and lots of renewable projects

which can make money well below, you know, $30 in China. And that's so essentially if you're a coal plant, you kind of encumber you a fuel cost for that kind of competition. So I think they have started to get the market design right in all fairness. In terms of their motivation, I think a lot of this is driven by, I guess, a more tough outlook on their foreign policy and security environment. And there are realistic considerations that if you need to import, you know, a couple hundred million tons into your coastal provinces, and you can't build inventories more than 30 days there, and you have a marine conflict in your local neighbourhood, and you can't get merchant marine through, then your power grid goes down in less than a month. That's obviously something they can't really tolerate given some of their ambitions in the region.

So I think there is a strong security angle to some of their new religion around decarbonization. So who loses big picture as the decarbonization effort continue and make serious progress and greater production of renewables and or nuclear domestically, who ultimately loses out from that ship? Sure. I mean, right now, there's part of the reason the coal market is so strong is due to a lot of supply interruptions in Indonesia, and China also had to buy a lot of coal imports very quickly at the end of last year.

Longer term, it's very bad for the major coal exporters, which are to China, which are Indonesia, principally. Australia, which does not, China has banned from exporting coal to them due to diplomatic frackers and so forth, there will be major losers from the shrunken thermal coal market for seabor on shipping. But for met coal, which goes into steel, which is a different sort of thing, Australia will be the big loser there, but also Russia and the US. And, I mean, the only reason the met coal market is very strong right now is because China was buying most of its net coal from Mongolia in 2019. But due to closing the border, due to COVID, keeping it substantially closed, that's led to this

explosion of coal exports from Russia and Canada and the US to China to replace the fact that they kicked out of Australia, they closed the border with Mongolia, and they happen to buy very expensive coal from a very long way away now. You mentioned incentives and the idea that energy producers are very much incentivized to shift to renewables in the current market. But one thing we saw last year when coal prices were actually spiking was China liberalized its market. And I think it said it would allow prices to rise something like 20% in order to incentivize more power production. And I think it was something like 10% before. So I'm wondering how significant is that shift? Is that a permanent liberalization of the market

in order to encourage more energy production? Or is it more of a one-time thing? to try to balance out the market immediately? Well, what happened was in September that the coal price got so high. I think at one point got to, a futures in Jung-Dur got to like 2,000 renminbi a tonne plus. The power plants, which were obliged to produce, but could not get prices above a certain level and cover their fuel costs, just said, oops, I need to do some plan maintenance, or, oh, no,

someone turned off the machines. And so you had these rather blackouts because the utilities, were just electing to, you know, not produce a loss. And so they made all these adjustments to maximum coal price and then fuel costs passed through to enable the market to kind of function again. And that seems to be working, you know, okay now. There's a reasonably wide ban,

so it's 20% either side, and under normal circumstances, that should be more than adequate to ensure that people have a reasonable price signals. But, yeah, there was just absolutely panhand money in September and October. On April 4th, 2023, around two in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, we did this to you.

What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. I mentioned this at the beginning. it's just out of curiosity. Has the short-term policy been affected by the upcoming Olympics? I know there's always talk about, you know, blue skies or the goal of having good air quality ahead of big events. Is that affecting current market conditions at all?

So there's two ways to make steel. One is with a blast furnace where you use a lot of cooking coal and thermal coal for heat. And the other way is with an electric oil. where you just use cooking coal and electricity. Electric arc furnaces are generally smaller, less noisy and make less emissions. And so, for example, before the Olympics, they'd be telling everyone to stock up their thermal coal

so they can produce the electric power around the electric arc furnaces and for absolutely everyone to take maintenance stays off, not use blast oxygen furnaces to get, you know, to have blue skies and so forth. I think there's going to be extended time off. the factories around Hebei, which is the province that surrounds Beijing, to ensure that they have the desired scenery and background. It's not the first time they've done it. I saw them do it in 2008.

They'll do it again this time. It's somewhat predictable. So we started this conversation talking about the supply chain of energy and the idea that one disruption in China can have a knock-on effect to European prices. So I'm wondering, we've already seen Chinese or we've already seen prices for China coal start to come down. And you talk about some projects to build up capacity, specifically that big mine in Mongolia and a lot of the renewable projects. At what point does capacity get built out enough that it starts to ripple back through the European market and prices start to come down there? Well, it's interesting. I mean, just recently, and I think we're speaking towards the end of January,

mid-late January. China's already turned around and said they will start selling LNG cargoes back into the market. Yeah. And that's already taking down European gas prices and the relevant LNG spot and swap markets quite sharply over the last couple of days. And we'll probably continue to do so. So that's already happening. Like seaborne thermal markets are still reasonably tight due to disruptions in Indonesia, which is ironically due to intensified rainfall from sensitive climate change driven. So I think we will start to see things normalized as we get toward the end of the year. China will have very high inventories. They will not be aggressive buyers of seagorn coal and Indonesia, I assume, will have slightly more normal weather patterns

as a L'inia weekends and then they'll be able to produce more. So there's this sort of driver of the energy, this energy super spike does seem to be settling down quite sharply. Is this the super spike that we've seen this year in Europe, is this sort of, you know, as you said, was it kind of a one-off fluke? Or is this something that due to structural factors that will take a while to ameliorate could see a recurring winter phenomenon going forward? I think this was this was a one-off. I doubt China will have issues that's called. market quite as acute as they had last year because it was tied up with anti-corruption campaign inspections and a bunch of things which are not market-driven, I would say, but do impact markets.

So I don't think that will occur again. They do appear to be having more coherent policies around what inventories people should hold so that you don't get situations where things get that desperate again. And then they have partially liberalized their power markets, which should give that a long-term signal. So I think China's less likely to be a ground zero for large shocks that propagate out through energy markets. On the other hand, it's so big that even minor shocks in China can feel very big elsewhere, especially if markets are generally tight otherwise. So one thing, or let me just think how to phrase this. So I saw you tweeting late last year,

and this was still when coal prices were spiking quite a bit, and you are basically saying everyone is about to get shocked because prices are going to start coming down very soon. What was it that you were seeing in the market that perhaps others weren't seeing at that time? Because you did turn out to be right. And of course, we have seen coal prices ease since then. There's a lot of very niche data you can get. This is from Chinese railways and so forth. So you can get data on how much coal is being loaded in these large railheads near mines, in Indonesia and in Shanzi, in Shanzi. And then you can sort of get the number of trains loaded

and can start to see the, like a tidal way. You can sort of start to see the water sucking back from the beach before it kind of gets, blows the other way. That's what you can see. And you can get that a daily frequency. So once that supply response really started to happen at the mines, And then they started to essentially suck all the rail cars out from Chinese ports, northern ports, up to the mines. You knew something was coming.

And even normally when the Chinese government puts out a Nordpoint's bulletin to make something happen, it's normally a pretty safe bet it will happen, at least the short term. But the size of the response, I think, was quite shocking to a lot of people. Obviously, like, higher commodity prices, higher energy prices, inflation, or higher transport. cost has inflation more broadly around the world, like, it does feel like there's a lot of temporary or transitory factors driving it. I know we're not, like, supposed to use that word anymore. And I know that there's more to life than, like, what's happening in the Chinese coal market. But when you think about, like, how, you know, the idiosyncratic factors happening in the Chinese coal market, the way that, and I loved your analogy of a large adult jumping on a trampoline

with a bunch of little kids, the way that filtered into. European prices, the way that European energy prices have filtered into fertilizer prices, the way fertilizer prices, feed into food prices, and so forth. It's hard not to sort of feel like, yeah, there really are a lot of transitory factors. I don't know whether inflation will totally normal, but a bunch of weird stuff has gone on. I think so, but I think one thing that's also interesting is with coal and China in particular when they, the prices got up to 2000 room and be a ton for thermal, which is just absolutely enough. But then what was quite shocking to people as China came out and said, no, we want a long-term

target contract price of, you know, 700 remember a time, which people were shocked by because, you know, pre-COVID it was 550. And I think what China's doing there, which is quite shrewd, is that in all the craziness and inflationary impulse of all these disruptions, China's using this opportunity to force a repricing of fossil energy in China through to industry. And that has big impacts because when you smelt a ton of aluminium, you need about 11 megawatt hours do that. And so that's, you know, 11 times 150 REMP. You know, it's like pushing up the price of aluminum in the order of, you know, $1.50.

They're sort of pushing through these kind of policy-driven repricings because they do want to speed this, you know, carbon transition and change incentives around consumption of various. energy-intensive products to a certain extent. On the other hand, they've got the social stability and the maintaining sort of, you know, employment or all the other objectives they have. But there is a sign that they're kind of willing to take a bit more pain than they were last time on some of these cost changes. So there are some fundamental changes here. And, you know, there's sort of China putting a bit of a floor under the price of coal

and therefore under the price of other commodity production that are not just going to revert to pre-COVID level is sort of a de facto or an implicit like carbon tax the way economists in Europe and the US proposed. And you are saying that come through. Like you talk to companies like Shanhua, which is like China's biggest coal miner. When I asked them in 2016, I said, you know, you guys can try to go under renewables or something that would say, well, they do that. You know, I'm never getting paid my subsidies on time.

It's a terrible business. And, you know, no, thank you. And now that they just announced they're going to give a renewable. So essentially the policy. signals and the sort of will of the party state is to get things done in this area. Now, whether they can tolerate a slowdown in real estate and other considerations is to be seen. But in other ways, there are signs of them being more serious than they've been in quite some time. All right, Alex, that was a fantastic discussion and a really good roundup of what's going on

in the space and drawing the connections between China and Europe. So thank you so much for coming on all thoughts. Cool. Thank you so much, guys. Really enjoyed it. Bye-bye. That was great. Thanks, Alex.

So, Joe, I obviously thought that was a very interesting conversation. One of the things that struck me was, I think energy might be one of the few places where there's actually policy agreement between China and Europe. So Europe wants energy prices to come down. China wants to build out its energy efficiency and self-sufficiency. And sort of going back to that challenge. The trampoline analogy, you know, the kids want the adult to get their own trampoline, I guess. And the adult wants their own trampoline too.

So, you know, if both of those parties are aligned, it seems like at some point that could happen. One thing that I've always liked about Alex's work and research and just following his stuff and talking to him over many years is the granular level of detail. he knows about all these different industrial processes, whether it's like how much it costs to make steel and the various, the electricity budget for steel or aluminum. And obviously he talked about how he was able to sort of anticipate the moving coal by looking at rail loadings. There's a deep granularity. I guess like if you're going to be working in the business of buying of distressed assets of industrial or commercial. commodity-related companies, you really have to know, like, nuts and bolts, what the value and what the potential recovery, you know, I guess, I would say, to understand recovery values of these assets, you really have to know, like, the various, like, input costs and what you can get out of them. Yeah, it definitely seems like that's the case.

The other thing that I was thinking about is, I guess, all eyes on Mongolia and China relations for the foreseeable future, because it also seems like that's a dynamic where it does have the potential to impact the energy space quite significantly. Absolutely. And I'm really glad, like, the point that he made at the end. It's like, okay, so coal prices went nuts. And obviously, China needed to make changes to address that. But the idea that, like, they really don't want to, or at least at the moment,

they don't want to go back to the pre-crisis, dirt cheap prices, and that this is an opportunity for transition. And so setting this floor is really interesting. And I definitely think listeners, hopefully if they haven't, need to go back and listen to the episode that we just recorded with Travis Lundy, because I hadn't thought about that really at all, although, of course, it makes sense that it's part and parcel of the same thing. Like, if you want to have a more sustainable energy budget, part of it might involve changing the pace of real estate development. Yeah. it's interesting how those two seem to fit together, and you're right. I hadn't thought about that before.

No. In any case, lots going on in China and the Chinese economy. Should we leave it there? Let's leave it there. All right. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway.

And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our guest Alex Turnbull. He's at Alex B.H. Turnbull. follow our producer Laura Carlson at Laura M. Carlson. Follow the Bloomberg head of podcast Francesca Levy at Francesca Today. And check out all of our podcasts in Bloomberg under the handle at podcasts.

Thanks for listening. April 29th and 30th, Bloomberg House arrives in Miami at the Formula One Grand Prix. Set against one of the world's most electrifying sporting events, Bloomberg House brings business, investment and culture together, powered by Bloomberg journalism, real-time data and forward-looking conversations. From onstage discussions to exclusive networking with global leaders, this is where ideas connect. Bloomberg House Miami, presenting sponsor, Corian, supporting sponsor, OCTA. Learn more at BloombergLive.com slash Bloomberg House Miami.