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China Review

China’s coal hunger to put a floor under prices

Fast pace

C

hina’s appetite for im ported coal will pro vide a solid floor for

global prices of the fuel this year, but its imports may miss last year’s peak as price-sensi- tive buyers shy away from re- bounding prices, say analysts. Despite being the largest

global producer of coal, the People’s Republic of China still took the excess coal supply in the Asia-Pacific market last year and attracted coal from as far away as Colombia, South Africa and the US as the eco- nomic meltdown shrank world demand and caused a drop in international prices.

More energy

China’s importance to the glo- bal market cannot be overem- phasised. According to Nobuo Tanaka, executive director of the International Energy Agency, China’s coal produc- tion now provides more en- ergy to the global economy than the whole of Middle Eastern crude oil production, a point that underlines the im- portance of China to the glo- bal coal market. According to data from

Euracoal, China was a net coal importer in 2009, with a swing in demand of about 100 mt compared to the previous year. “World prices would likely

have collapsed without this net increase in demand from China,” it says in its latest report.

Market surge

China sources its coal imports from Australia, Indonesia and Vietnam, with Russia, Mongo- lia, and Canada being the main second-tier suppliers. PRC coal imports in 2009 saw a year-on-year increase of 210%, say Richard Wilmot and Paul Aston, partners in the Shang- hai office of Holman Fenwick Willan, a global law firm that

With China’s dominance of the global coal market unchallenged, what are the issues affecting its domestic coal industry?

advises on all aspects of inter- national commerce. According to Wilmot and

Aston, the increase in China’s domestic coal price and its eco- nomic stimulus package in 2009 resulted in an increase in demand for coal from its metal, cement, steel and automobile industries, resulting in a dra- matic surge in its coal imports. This meant China became a net importer of coal, importing around 103.43 mt and export- ing 22.40 mt of coal, down 50.7% year-on-year from 2008. Claus Schensema, manag-

ing director, GAC Forwarding & Shipping (Shanghai) Ltd, says that the quality of China’s domestic coal as well as the price of imported coal is creat- ing an imbalance and a logistical challenge for the country. “In addition, there’s the au-

tomotive industry’s insatiable demand for electricity, as well as the domestic construction industry’s equally demanding need for energy power. “These have resulted in a

surge of foreign and domestic dry bulk players entering the market to try to meet the de- mand for coal, which in turn has resulted in the rapid in- crease in prices” he told CTI.

Consumption growth

Market analysts say that this year China’s growth in coal consumption could keep pace with its economic growth, fore- cast at 9.5%. “Demand is probably going

to grow 8 to 9%, in tandem with GDP growth,” said Lu Ping, analyst at China Merchants Securities.

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“Imports may fall below

100 mt in 2010, unlikely to stay on last year’s stunning level. It won’t be as easy to buy coal from the international market as last year.” With China’s 2010 output

forecast at around 3.3 bt, 9% demand growth would imply a fall of about 10% in net im- ports, and every 1 percentage point variance in demand would raise or lower annual imports by about 30 mt. “If China keeps doing what

it’s doing - it doesn’t have to grow, but just stay where it is - and the US and Western Europe and the rest of the world re- cover, we think that the market is going to be very, very tight for the next two or three years,”

The world’s third-largest economy accelerated back to life with economic growth of 10.7% in the last quarter of 2009, the fastest pace since 2007. This bolstered the out- look for coal demand, which has been buoyed by a harsh winter and the appetite of Chi- na’s huge steel sector. As a major coal importer,

China expects to face greater demand with an improved economy. However, imported coal may lose its edge on ris- ing international prices and in- hibit China’s coal imports in 2010. But a price spike didn’t stop

PRC power generators buying in what analysts called “des- peration” over winter, however. Standard Chartered coal

analyst Judy Zhu said lower coal output would reduce Chi- na’s reliance on the domestic market and increase the need for imports.

Even a small drop in China’s domestic supply can lead to a significant surge in coal imports

“Generally we still expect

Teck Resources president Don Lindsay said.

China to be a very strong im- porter of coal this year,” she said. China’s main suppliers of

coal last year were Australia, Indonesia and Vietnam, but the country’s hunger for imports and low global freight rates spurred shipments from as far afield as the US and Canada.

Thermal demand

The global market has been rocked by the sudden emer- gence of China as a major buyer of thermal coal, a com- modity in which it was previ- ously self-sufficient. “The seaborne thermal coal

trade’s fortunes have become increasingly tied to those of China’s domestic market, ef- fectively linked by China’s large, rising import flows,” UBS analysts said. The bank also raised its

forecast for contract thermal coal prices for the Japanese fis- cal year starting on 1 April, to $95/tonne from $90, citing high demand from China and India and supply-side problems in Australia, Indonesia and South Africa. “We’ll see an impact on

China’s imports unfold in April, when the higher contract prices take effect,” one analyst said. In Qinhuangdao, China’s

top coal port, prices of coal with calorific value of 5,800 kcal/kg rallied about a third from the end of August to about 745 yuan/tonne in March. Seasonal demand, transport

disruptions caused by cold snaps and constrained supply from coal mines pushed up the prices and will keep import lev- els high through the first quar- ter, traders and analysts said.

Price surge

The ongoing negotiations for long-term power coal supplies between Australia and Japan are very likely to conclude on a final contract price of US$95- $100/tonne. Thereby, international con-

tracted coal prices in 2010- 2011 are expected to surge 40% year- on-year, according to a report by the China Securities Journal. China’s power plants have almost finished their ne- gotiations with domestic sup- pliers for an average contracted price increasing 50 yuan ($7.32)/tonne. The Shenhua Group and

China National Coal Group Corp, China’s top two coal pro- ducers, wrote 80 mt and 60 mt of contracts with power pro- ducers, respectively, with con- tract prices up 30 yuan/tonne 570 yuan ($83.5)/tonne. Domestic price gains have

been outstripped by those of international prices. In 2009, the average inter-

national price stood at $70/ tonne. If it surges to $100/ tonne, equivalent to 680 yuan/ tonne, it will surpass that of domestic prices.

Coking coal increase

China’s

second-largest

steelmaker Maanshan Iron & Steel has said that it will in- crease coking coal imports this year, adding to rising global demand that has sent prices soaring.

6

The company bought be-

tween 800,000t and 900,000t from BHP Billiton last year, Maanshan Iron & Steel chair- man Gu Jianguo said. “Imports from BHP will

likely be sustained.” “Our demand for imported

coking coal will increase this year,” he said. “The exact import level will

depend on domestic and over- seas prices. If prices are low, everyone will be buying from that market.” Altogether coking coal im-

ports by China, the world’s largest steel-maker, surged five-fold to 34.4 mt in 2009 af- ter the government closed smaller unsafe mines, said Wu Xinchun, a consultant to the China Iron & Steel Association. BHP has won a 55% price

increase from Japan’s JFE Holdings as the global economy picked up and Chi- nese purchases bolstered de- mand. Prices for coal bought from BHP are negotiated pri- vately and don’t follow bench- mark contracts set between Japanese mills and the mining company, he said. In related news, China Ship-

ping Group expects to ship 40 mt of coal for Shenhua Group, the country’s largest coal pro- ducer this year, president Li Shaode said. “The first two months of this

year have already seen 7 mt of coal shipped, and we estimate it will rise to 40mt for the whole year,” he said. In 2009 China Shipping

transported less than 10 mt of coal for Shenhua Group, when its shipments totalled 159 mt.The company has ordered 16 VLOCs, eight with capac- ity of 230,000t. Four of these will start sailing this year.

Sector restructure

China’s coal production contin- ued to be restrained in early March, as local governments kept small mines shut during the annual meeting of the coun- try’s parliament, considered to be a politically sensitive period. Supplies will also be limited

by a campaign to consolidate mine ownership in the hands of a few big players in China’s tra- ditional top coal-producing province of Shanxi. This is part of a move to clean up the dan- gerous and polluting coal sec- tor, a plan shared by other big mining provinces. In February 2006, the Na-

tional Development and Re- form Commission revealed a plan to restructure China’s coal sector and reduce fragmenta- tion in the industry. Their goal is to establish five to six giant conglomerates in China’s main coal-producing provinces and to close down all small coal mines by 2015. This plan is projected not only to improve safety, but also to improve ef- ficiency. According to one industry

report, at the end of 2005 China had 25,000 coal mines. Inde- pendent analysts estimate that over the past few years China has closed between 20,000 and 50,000 small coal mines, and about 200 mt of production from small mines is proposed for closure says Richard Wilmot.

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