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The Great Squanderer

China's Scramble for Energy

By Wieland Wagner

With a rapidly expanding economy, China doesn't have enough of its own natural resources to cover its growing energy needs. Beijng is trying to close the gap by increasing its imports and by betting on nuclear energy and renewables.

For years Korla was just a bleak backwood in Xinjiang, China's autonomous Western province. No one spent much time in the city if they could help it. There's nothing particularly inviting about its ugy low-rise buildings, or its location on the edge of Asia's largest desert, the Tarim Basin. Scorching hot in the summer, it turns bitingly cold in the winter, when it's racked with rough winds from the nearby Tianshan Mountains.

But lately the city of 400,000 has achieved unprecedented splendor. Gleaming office towers rise from the sand; boutiques and restaurants tempt shoppers on its broad boulevards; expensive sculptures are displayed in the parks; and a new highway on the city's outskirts provides better access to the provincial capital Ürümqi.

Drive into the broad Tarim Basin for about two hours and you'll soon discover the source of this new-found wealth: Drilling derricks rise up from the barren earth; flames flicker up into the sky; giant pumps move tirelessly up and down; and a maze of pipelines criss-crosses the desert: You've reached the edge of one of China's largest oil and natural gas extraction sites.

The Chinese call the Tarim Basin the "Sea of Hope" -- because of the generous supply of natural resources there. Xinjiang used to be seen mainly as a potential trouble spot because of its Muslim minority, the Uyghurs. Now the region is becoming increasingly important economically: It makes a vital contribution to sating the global factory's hunger for energy. As recently as August 2005, China put a 4,000 kilometer (2,486 mile) gas pipeline into operation connecting Xinjiang and Shanghai, thus catering to the rising energy needs of the great industrial center in Eastern China.

But while China's increased efforts to exploit its own oil and natural gas reserves provide some relief, the country's supply isn't enough to satisfy the long-term demand -- which is growing inexorably.

The same is true of its metal and mineral resources. Whether it be iron ore for steel plates or copper for electric wires -- anything that can be bought, the Chinese are buying it. And as a result they're pushing up world market prices, at least temporarily.

Keeping up with the economy

Jin Guoliang has had a ring-side seat to witness China's rise to the status of a major resource consumer for over 30 years. The manager's office overlooks a freight terminal in the port of Shanghai. Ships from abroad deposit natural resources here, and then leave with finished 'made in China' products. Copper plates and aluminium bars awaiting further processing lie piled up on the long mole by the Huangpu River. Next to them are rolls of high-grade steel, ready for shipment abroad.

An endless series of heavy freight trucks rattles down the Jungong Road, a broad access road that resembles a single stinking cloud of exhaust fumes. The trucks bring new freight into the port, or pick up freight that has just arrived from abroad. "My job gets more hectic every year," Jin groans -- and then he laughs.

China's economy is expanding at an average rate of nine percent every year. Economic planners in Beijing recently discovered that their economy is actually 17 percent larger than they had previously thought. That's as if the Chinese had accidentally discovered an economic surplus the size of Turkey's Gross Domestic Product.

The consequence is that China is getting even hungrier for energy. But it's not just consuming natural resources to produce the many cheap products it exports to Western industrial nations. With growing prosperity, consumer demand is rising as well: Every year, millions of Chinese migrate from their villages to the large cities on the wealthy east coast. Many move into apartment blocks built from concrete and steel. Shanghai already has 4,000 skyscrapers -- twice as many as Manhattan -- and the new buildings are equipped with new refrigerators, new stoves, new air conditioning systems -- all of which were, of course, produced using natural resources and which themselves consume energy.

While China is responsible for only four percent of the world's overall economic output, it's already consuming 13.6 percent of the world's energy. During the last few summers, the citizens of Shanghai experienced firsthand the kind of bottlenecks the country's industrial revolution can create: The city administration was forced to temporarily switch off the neon lighting that is the hallmark of the city's panorama of skyscrapers. Had Shanghai not taken this measure, the electricity grid would have failed due to the extra strain that comes when the city's countless air conditioning systems are switched on during the hot summers.

Lights out in Shanghai

Suddenly the Oriental Pearl Tower, Shanghai's trademark skyscraper, disappeared into the darkness. Many factories were prohibited from running their machines on weekdays and had to limit production to nights and weekends. China's industry consumes two thirds of the country's electricity.

Resource shipments are also straining China's infrastructure and bringing it close to breaking point. Just the shipment of coal, which covers about 70 percent of China's energy needs, is often too much for the country's freight train network and frequently causes it to shut down. And coal combustion also pollutes the air. China is the second greatest producer of greenhouse gases in the world, right after the United States. And in mining provinces like Xinjiang and Shaanxi people are paying for the economic boom with their lives: 6,000 mineworkers died in 2004 alone, victims of the often outrageous working conditions in the coal pits (many of which are illegal).

But as desperately as the Chinese may be searching their giant nation for new resources -- they're also becoming more and more dependent on imports and this global search for supplies is increasingly dictating Beijing's foreign policy. Steel production, which has doubled in recent years, is of particular concern to the Chinese government. Half the iron ore required by the country's 800 steelworks needs to be imported.

Baosteel is China's biggest steel producer -- and number six on the world market -- and is thus one of the most important consumers of iron ore in the world. It continues to claim more space for itself amid the bizarre industrial landscape of smoking blast furnaces and lengthy pipes that sprawls along the banks of the Yangtze River in Shanghai. The company has its own port on the river, where freighter ships arrive with iron ore. From there, the vital resource travels along conveyor belts and into the blast furnaces and the clunky steel plates travel along the rolling mill like glowing projectiles. A rumbling sound is heard, like giant bowling pins falling over, and then the finished product appears in the form of neatly rolled up sheet steel.

Since 2000, China has been responsible for 93 percent of the increase in global iron ore shipments. Most freight ships arrive from Australia or Brazil. They're dispatched by mining corporations like BHP Billiton or CVRD -- corporations that could get away with price increases of more than 70 percent last year, thanks mainly to their insatiable Chinese customers.

So it's understandable that China wants to break the foreigners' price monopoly. Minmetals, a trading company for metals and ores founded in 1950, plays a central role in this project. The company's Beijing headquarters are located in a monstrously large building with endless corridors, the former seat of China's Trade Ministry. He Jianzeng, a manager at the company, is responsible for obtaining so-called black metals, like iron ore, manganate and chromium.

He travels abroad -- to South America, Africa or North Korea -- almost once a month. He is searching for mines that could be suitable investment targets for Minmetals and his company isn't discouraged by the occasional setback. For example, Minmetals wasn't able to carry out its planned purchase of the Canadian mining company Noranda, but it is persisting. There's no reason why China, the main consumer of iron ore, shouldn't be allowed to influence the price of this resource in the long-term, he says.

China is already an important factor in what happens on the world's resource markets. But, because China is not a free market economy, traders and market analysts can rarely rely on the pure theory of supply and demand when they write their forecasts: Domestic resource prices are regulated by government officials in Beijing.

Baffling the analysts

There has been a futures market in Shanghai since 1990 -- copper, aluminium, natural rubber and fuel are all traded there. The traders sit in an enormous hall, more than two storeys high. They wear red vests emblazoned with golden numbers while the current exchange rates flash up on the wall -- rising prices in red and falling prices in green. But the trading that goes on here is lacking in drama and this futures market is characterized by a peculiar calm.

Only occasionally do things get exciting -- like the time Liu Qibing, a trader from the government reserve office, suffered losses in the region of a hundred million dollars in the fall of 2005, when he was "going short" on copper. Acting on his own initiative, he sold 130,000 tons of copper with the intention of buying them back at a lower price later. But copper prices rose instead, and the excitement over Liu's miscalculation drove them up even higher. The embarrassing mishap made the world's business press hold its breath for weeks. The Chinese couldn't forgive Liu: He was fired. And his terrified former colleagues suddenly acted like they had never heard of him.

The copper trader's debacle has put further pressure on Beijing to reform its distorted pricing system for resources. The same is true of oil: Chinese drivers only pay about a third of the European gas price. The government is keeping the gas price artificially low, out of concern for state-owned businesses, farmers, taxi drivers and the People's Liberation Army.

The gap between rising world market prices and China's domestic prices is causing serious harm to China's oil giants, and they're having a hard time explaining their problems to foreign equity holders. In a measure intended to counteract these problems, the Chinese government stepped in to help Sinopec -- the Chinese oil corporation whose equity shares are traded abroad -- by subsidizing it to the tune of about €920 million ($1.180 billion). The domestic press called this generous subsidy a "dahongbao" -- one of the large red envelops filled with money that the Chinese receive from their relatives on New Year's Day.

But money is hardly an issue for the Chinese government, whose currency reserves of more than $850 million are now greater than those of Japan. Nor are the Chinese short of grand plans when it comes to expanding their electricity grid. The Three Gorges dam project on the Yangtze River has become an international symbol of China's megalomania.

The Chinese destroyed a unique scenic jewel in order to make this project happen. The dam was first put into operation three years ago and the plan is for the dam's 26 giant generators to produce an annual 85 billon kilowatt hours of electricity by 2009 -- after a 16-year construction period, the resettlement of more than a million people and the employment of as many as 37,000 workers.

That would be a technical dream come true for Liu Lire, the project's deputy chief engineer. "We've used the best technology in the world," he explains, sitting in the main conference room of the operating company's offices near the dam. Liu insists the dam is entirely safe, immune even to nuclear bomb attacks and heavy earthquakes.

The dam now cuts through the river landscape like a surgical scar. The five locks alone resemble a concrete and steel monster and ships need at least two and a half hours to move through them. But China's communist leaders -- most of whom studied technical subjects such as machine construction -- view the giant project as an homage to progress. For them, this takes priority: They want progress to secure their power in the new capitalist era just as it did in the past.

How much electricity does China really need? How reliable are the predictions formulated by its economic planners? Bureaucrats seem uncertain. China may have to recalculate the figures concerning its energy needs, just as the GDP figures had to be revised. "I'm concerned we may even experience surplus electricity capacity during the second half of 2006," Zhang Gubao, the Deputy Minister of the National Development and Reform Commission, warned last year.

Still China continues to move its giant projects forward, including those in the area of nuclear energy, which currently meets about 2 percent of the country's electricity needs. China wants to build as many as 30 new nuclear reactors over the next 14 years -- about two a year. Foreign companies specializing in reactor construction -- whose business has been in the doldrums for decades in the West -- are hoping to benefit from one of the last lucrative growth markets left for their controversial technology.

The Chinese themselves hope nuclear technology will allow them to make a technological leap forward. They want to build the world's first commercial pebble-bed reactor. This type of reactor is said to be far safer than current reactors, as uranium oxide isn't contained in fuel rods, but in round graphite containers the size of tennis balls.

Reds go green

But these gigantic construction projects can only satisfy part of China's energy needs: They'll only increase nuclear energy's contribution to the overall electricity supply to four percent. And so the red leaders are starting to think green: Their most recent five-year plan vows to reduce energy consumption per GDP point by 20 percent.

True to the tradition of communist economic planning, this ecological goal will probably not be met. Instead, Chinese industry needs to re-invent itself. Because right now -- with its gas-guzzling cars, its badly insulated houses and its poorly run factories -- China is one of the world's greatest squanderers of energy. It consumes seven times more energy than Japan for each dollar of economic output it produces.

Beijing wants to change that. Nine provinces have been selected to experiment with ethanol and other biofuels. Beijing is also promoting the use of water and wind power as part of a new law on renewable energy sources. China's largest wind power park is due to go into operation this year. It's located about a four-hour drive away from the economic center of Guangdong, on a cliff-lined coastal strip.

The plan is for the 167 turbines to produce more than 10 million kilowatts of energy a year. That may be a tiny amount for the booming export region in southern China. But Wu Xiquan, the deputy director of the Yudean electricity company, sees himself as the leader of a model project for the nation. He's placed the country's red national flag ceremoniously next to the company pennant on his desk. China is still lagging behind in the area of gentle energy sources, he says, but the government wants change.

And there's something else Wu wants his wind power facility to show: That China can become an important exporter of technologies that would help sate the world's hunger for energy in an environmentally friendly way.