Energy

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

(Updated )

If evidence were needed that China's energy landscape was shifting dramatically, the latest figures on fossil fuel production should dispel any doubt.

Crude oil output fell in July to the lowest level since October 2011, according to data released by the country's National Bureau of Statistics on Friday. Coal mining slowed 10 percent to 1.9 billion metric tons during the first seven months of the year.

China doesn't seasonally adjust these data but you can strip out volatility by calculating 12-month numbers. On that basis, apparent oil consumption -- a measure of domestic production plus imports net of exports -- peaked last August and has been declining ever since:

Out of Gas
China's trailing 12-month apparent oil demand peaked nearly a year ago
Source: Bloomberg, China National Bureau of Statistics, China Customs General Administration
Note: Based on average of trailing 12-month figures. January and occasionally February data is missing from the data series due to issues around reporting of Lunar New Year numbers. Estimates have been filled in using the average of adjacent months.

The picture in coal is even more dramatic:

Black Hole
China's trailing 12-month apparent coal consumption has slipped to its lowest level in years
Source: Bloomberg, China Coal Resource, China Customs General Administration
Note: Apparent demand calculated by adding coal imports net of exports to raw coal output.

In other countries, natural gas has been the prime beneficiary of declining demand for dirtier fossil fuels. That's less the case in China, where antiquated price controls are limiting consumption even as a glut pushes down the global cost of liquefied natural gas:

Inflationary Period
China's trailing 12-month apparent natural gas consumption soared after the loosening of price controls last year, but is leveling off
Source: National Development & Reform Commission, Bloomberg
Note: Before September 2014, there are sporadic gaps in the monthly data series. Averages of adjacent months have been taken to avoid artificially low readings.

Some of this is a result of the general deceleration of China's industrial economy, but not all. Despite these fuels' sputtering performance, electricity consumption in June was still up about 4.3 percent on a year earlier, or 2.8 percent on a trailing 12-month basis.

Hydropower has been the main winner. Trailing 12-month electricity output from China's dams has climbed 33 percent since June 2014, more than compensating for the 1.9 percent decline in generation from other sources.

The Dam Fills
Hydropower accounts for all the increase in China's electricity output over the past two years
Source: China National Energy Administration, China National Bureau of Statistics, Bloomberg
Note: Shows trailing 12-month output. The data series has occasional gaps around Lunar New Year: We've taken averages of adjacent months to limit the risk of under-counting.

While the Three Gorges Dam has been the poster child for this industry, it's far from the whole story. Since that project's completion in 2012, China's hydroelectric-installed capacity has increased another 30 percent, to 297,000 megawatts in 2015, according to Bloomberg New Energy Finance data. That's equivalent to the total capacity of the next four biggest players -- Brazil, the U.S., Canada and Russia -- put together.

Go With the Flow
China's installed-hydropower capacity is now equivalent to the next four biggest producers put together
Source: Bloomberg New Energy Finance

The declines that coal and oil have suffered ought to find a floor at some point. But the rapidity of this shift should serve as a warning for those hoping Chinese demand will bail out a global fossil fuels sector awash in excess capacity.

If anything, the next few years are likely to apply further pressure, as the completion of the country's ultra-high-voltage grid opens up generators in the east to competition from the north and southwest, where vast quantities of hydro, wind, and solar generation are currently wasted because there's insufficient local demand.

Winds of Change
Installed capacity of major electricity-generation technologies in China
Source: Bloomberg New Energy Finance

Thermal coal demand in China's coastal provinces will shrink 20 percent to 640 million metric tons from 800 million tons once the grid network is up and running and a larger proportion of this capacity is put to use, Deutsche Bank's James Kan wrote in a note to clients last August.

That should worry those who've chased the 27 percent improvement in prices for Chinese import coal this year. The 160-million-ton shortfall Kan forecasts is equivalent to all of the coal China imported in the 12 months through June.

In that scenario, the bigger risk isn't that coal imports will slip, but that local mines will follow the example of the country's steel industry and turn to exports to plug the domestic demand gap. If there's one thing worse for struggling commodity producers than flagging Chinese demand, it's growing Chinese supply.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects hydroelectric-installed capacity figure in eighth paragraph.)

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net