Could Coal Tip U.S./China Trade Balance?


"Aggressive devaluation of the yuan. . .may not last."

To me, the most positive news lately has been an increase in utility rates for key commodities industries in China, along with an associated increase in U.S. rail ladings of metallic ores and furnace coke. If China's decision to increase utility rates is a sign that the Chinese government is no longer able to subsidize utility rates and maintain the purchase of U.S. Treasuries that allow it to keep the value of the yuan artificially low, then this could be a chink in China's economic armor.

China's March trade deficit of 7.2bn may signal that its aggressive devaluation of the yuan in order to maintain price competitiveness in the consumer goods markets may not last. China has been struggling this year with coal shortages caused by a massive and growing appetite for the hydrocarbon.

A China Daily article states:
GAC [General Administration of Customs] attributed the surge [in imports] to higher domestic coal prices and a supply shortage caused by the increase in demand after the economic stimulus package came into effect, which pushed up demand for high-quality coking coal in the steel, cement and chemical industries.
The amount of coal China has been importing is massive, and apparently growing. While nowhere near the highs of a few years ago, coal spot prices appear to continue trending steadily higher over the past six months.

Although many in the U.S. have disparaged the U.S. power grid for its difficulty in handling some wind power applications in the Southwest, we have a far superior electric grid in this country than you'll find in developing nations. If coal demand and prices remain so high that the Chinese government allows the yuan to float against the USD—to reduce relative cost of the national energy supply—then the price competitiveness of Chinese consumer goods manufacturers could be seriously compromised.

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