[NYTr] Env - China: Poor harvest, rising food prices and ethanol

[All the News That Doesn't Fit]

Energy Bulletin - Sep 9, 2007
http://www.energybulletin.net/34519.html

Low grain harvest, rising food prices and China's ethanol plan

by David DuByne

I want to stitch together some pieces of information, a set of events
unfolding, that that I describe as a double Achilles Heel in ethanol
production here in China. It's a case study in progress of rising food
prices and natural disasters influencing bio-fuel production, especially
ethanol, and new regulations for gasoline exports.

Last week, flipping through China Daily, an English-language daily here
in China I noticed a story "Autumn Grain Harvest Under Severe Threat".
In northern China, a drought has hit about 11.5 million hectares (27
million acres) of arable land, according to the Office of the State
Flood Control and Drought Relief Headquarters. In the past, the country
has satisfied nearly 100 per cent of its own grain demand. The autumn
harvest accounts for 70% of the total annual production. In January
this year Chinese corn consumption for 2006-2007 was forecast to reach
144.5 million tonnes, with country wide output reaching 144 tonnes.

In southern China flood waters have submerged about 9.7 million hectares
(21.5 million acres) putting the total submerged and parched dry land at
one-sixth of the country's 120 million-hectares (288 million acres) of
arable land. Add to this, the damage to half-a-million hectares (1.2
million acres) that have been devoured by rice-plant hoppers in Sichuan
Province, and at this time it is not clear whether the drought, flood
and insect pests would force Beijing to turn to imports.
Drought-stricken areas are the country's key bases of grain production;
flood-hit areas are the key to rice production. The 2006-2007 grain
forecast is razor-thin, consumption versus production, and remember
that China leads the world in consumption of rice and wheat. If China
indeed turns to imports, how much additional grain will be required,
and how much will it drive up grain prices on the world market?

The consumer Price Index (CPI) grew 5.6% in July 2007, the highest in
ten years, with meat (especially pork rising 43% in one year), poultry,
eggs and grains leading the index. The following month, in August,
China declared a moratorium on the construction of most ethanol plants.
Chinese officials recognized that producing corn-based ethanol was
linked to rapidly rising food prices. Xu Dingming, an official of the
National Energy Leading Group, told a recent seminar: "Food-based
ethanol fuel will not be the direction for China. Unless ethanol can be
produced using "non-staple crops," it won't be produced in China at
all".

During the last week of August, the National Development and Reform
Commission (NDRC) stated that China's major oil refiners should strictly
control oil product exports. The NDRC is the government body in China
that normally decides economic and pricing policies. Immediately
following the order, the Petroleum & Chemical Corporation (Sinopec),
Asia's largest refiner, now plans to export no more than what is called
for from its fixed long-term contracts, and PetroChina, the other major
oil refiner in the country, cut August gasoline exports to 160,000
tonnes - a decrease of 33% - the year's lowest figure so far, according
to state-run China News Service. The report added that, apart from
contracted supplies such as those to Hong Kong and Macau, Sinopec will
reduce oil product exports in all regions to the lowest level of the
year as well.

On September first the head of China's Energy Ministry, Ma Kai, in a
live television speech stated "For the long-term development of our
Chinese nation, saving energy and reducing pollution are so important,
so urgent. If we don't change this situation. the economy will go badly
and won't go far". It was the first televised large-scale appeal to
consumers to change their lifestyles and conserve energy.

There is still ethanol production in China coming from China's largest
ethanol producer China Agri Industries, which is the grain-processing
unit of Cofco Ltd., China's largest grain trader is planning to open
two more refineries this year, a 100,000 ton project in Hubei and a
300,000 ton project in Liaoning. These projects will use sweet potatoes
as the feed stock. An additional 1 million tons of capacity also using
sweet potatoes, awaiting permission, will be added by the end of 2008.
China Agri has started using a different feedstock grain, sorghum, to
produce ethanol. Sinopec and PetroChina have teamed up with China Agri
in the downstream ethanol blending business. Other feedstock plants for
China Agri ethanol plants include sugar cane and cassava. The shift of
feedstock has caused a bump up in price of sorghum and sweet potatoes.

Obviously ethanol production is a very important part of China's energy
strategy, but rising food costs and a billion and a half people watching
their food prices double in the last two years, a lot of unhappy words
have been spoken to the point that energy consumption has collided with
food production in a time of natural disasters. It seems the Chinese
course of action is to curb exports of gasoline, keep it in the country
to offset lost ethanol production. China in general has bountiful
natural gas, hydroelectric power and coal supplies. With Tajikistan
connected by pipeline filling in the gaps, there is no lack of energy
for factories and power plants.

This set of events only shows the true irreplaceable value of crude oil.
Even in countries and regions rich in two out of three fossil fuels,
there is no substitute for crude oil as the lifeblood of an economy.
Chinese road transportation networks use a combination of compressed
natural gas (CNG), electric vehicles, as well as ethanol-blended
gasoline - far more diverse methods and on a much larger scale than
North America - and this country still can't survive with outlarge
amounts of crude oil. If what we see unraveling here as a litmus test
for future reliance on substances other than crude oil to power our
transportation networks, the effects of peak oil and depleting oil
supplies worldwide will be far more damaging than most people expect.
It seems there is no "magic bullet" for our world's energy problems;
even a combination of "magic bullets" isn't enough. Right here, right
now staring you in the face, the vulnerability of ethanol production is
all too obvious.

[David DuByne currently teaches Business English in Chongqing, China.]