SteelOrbis Shanghai
The Chinese national economy continued to maintain its rapid growth trend in the first three quarters of 2007. As a result, the country's coal consumption also increased steadily. According to the preliminary estimates, China's national coal consumption this year has kept increasing, exceeding 200 million mt. Nevertheless, the actual growth rate indicates a slowdown. Supply and demand in the overall coal market has remained essentially balanced. Under the impact of climatic conditions and rail transport constraints, there have been variations in different areas at different times.
The major trends in China's coal industry in January-September 2007 may be presented as follows:
A. Production, supply and demand of coal remained basically balanced; production, transportation & sales increased in the meantime
According to the data from China's National Bureau of Statistics, in the first three quarters of 2007, above-scale coal enterprises produced 1.68 billion mt of raw coal, up 11.0 percent. According to the data from China's State Administration of Work Safety, in the first three quarters, 1.71 billion mt of raw coal was produced across China, up 8.1 percent year on year.
Year-to-date at the end of September, coal inventory in China was 162 million, up 12.2 percent compared with the start of the year and up 7.28 percent year on year. Of this quantity, the coal inventory of China's major metallurgical steel mills was 3.36 million mt, up 10.2 percent compared with the start of the year.
B. Changes observed in import and export of coal
In recent years, coal exports from China have declined while imports have increased. According to the data from Chinese customs, in September imported coal totaled 3.62 million mt and exported coal totaled 4.47 million mt, meaning that the situation of net exports was maintained for the third consecutive month. In January-September 2007, coal imports reached 38.61 million mt, up 47.6 percent year on year; meanwhile, coal exports totaled 38.01 million mt, down 20.9 percent year on year. As the figures show, China's coal import and export volumes in this period were very similar.
In the current year, coal exports from China have been declining, the logjams at the Australian ports have worsened, the price of steam coal in Asia and the Pacific region has been on the rise, and a new record of $75.85/mt has been seen in the international steam coal market. With the trading price increasing in the international coal market, coal exports from China have picked up rapidly since July.
C. Coal consumption continued its steady increase, but growth rate expected to slow
Looking at the situation in the electric power industry, in January-September 2007 total thermal electric generation achieved across the country was 1.9873 trillion kwh, up 284.4 billon kwh or 16.7 percent year on year. In the same period, China's raw coal consumption in electricity generation reached 883.54 million mt, up 112.56 million mt or 14.6 percent year on year; raw coal consumption for heating purposes was 93.76 million mt, up 14.90 million mt or 18.9 percent year on year. Regarding purposes of electricity generation and heating taken together, newly-added consumption of coal reached 127 million mt.
Looking at the situation in the steel industry, in January-September 2007 China produced 362 million mt of raw steel, up 54.28 million mt or 17.6 percent year on year; 242 million mt of coke were produced, up 39.30 million mt or 19.4 percent year on year, and the newly-added consumption of coking coal in the steel industry reached 37 million mt.
Turning to the situation in the construction materials sector, in January-September 2007 national production of cement amounted to 984 million mt, up 128.37 million mt or 15 percent year on year, while the newly-added consumption of coal in this sector came to seven million mt.
In the chemicals industry, on the other hand, in January-September 2007 national production of synthetic ammonia was 38.26 million mt, up 1.9 million mt or 5.2 percent year on year. The newly-added consumption of coal in this sector reached 5.8 million mt.
D. Coal prices, enterprise revenues, costs and profits increased; cost growth rate exceeded rate of price increase
Firstly, in January-September 2007 the trading price of coal in the Chinese market showed a distinct increase compared with the corresponding period of last year. Year-to-date 29th September 2007, the average trading price of coal in the market was RMB 427.5/mt, up RMB 30.3/mt or 7.6 percent year on year. Included in this figure, the average coal price at China's ports was RMB 441.3/mt, up RMB 46.4/mt or 11.7 percent year on year. Compared with the start of the year, the price of high grade steam coal increased by RMB 20/mt, while medium and low grade steam coal went up by RMB 10/mt.
Secondly, the revenues of coal industry enterprises continued to go up. In January-August 2007, the total sales turnover of large-scale enterprises in China's coal industry reached 436.05 billion, up 30.82 percent year on year (6.7 percentage points higher than the growth rate for the corresponding period of last year). Of this overall sales turnover figure, Shenhua Group registered RMB 68.40 billion, up RMB 14.91 billion or 27.8 percent year on year.
Thirdly, the total profits achieved by coal industry enterprises in China increased in the period in question, while the ratio of profits to costs remained unchanged year on year. In January-August 2007, the above-scale coal enterprises achieved profits of RMB 55.392 billion after taking subsidies into account, up RMB 16.168 billion or 41.22 percent year on year. Of this figure, Shenhua Group achieved a profit of RMB 21 billion, up RMB 3.868 billion or 22.5 percent year on year. In the first eight months of the current year, the ratio of profits to costs of the above-scale coal industry enterprises was 10.67 percent (0.77 percentage points higher than last year's increase rate). The profit growth of most regions and enterprises still depended on production growth and price increase.
Fourthly, the cost of coal increased fairly rapidly. In January-August 2007, the cost of raw coal was RMB 211.52/mt, up RMB 17.08/mt or 8.8 percent year on year. The raw coal cost of key coal enterprises in Shanxi province was RMB 185.45/mt, up RMB 32.8/mt or 14.9 percent year on year.
E. International coal prices remained at high levels
Influenced by many factors, such as the sharp increase in the international crude oil price, the soaring freight rates, the continuously depreciating US dollar, Australia's reduction of its coal export quota and the increasing demand for coal for winter stocks, the tight supply situation in the international coal market has undergone further deterioration. During the period of nearly one month from late September to late October, the price increase in the coal spot price in the European and Asian & Pacific regions was higher than 12 percent- a rare situation going by the experience of recent years. In the Asian & Pacific region, due to the sharp decrease in China's exports and the export bottleneck at Australian ports, supplies in this region have remained tight this year. With winter approaching in the northern hemisphere, coal stocking activity for winter has begun and all consuming countries have started to increase their coal imports, thus worsening the tight coal supply situation in this region.
F. Coal industry forecasts for the whole of 2007
China's domestic consumption of coal has remained on an increasing trend in 2007. The estimated demand for the whole of 2007 is 2.62 billion mt, up 230 million mt or 9.5 percent year on year (2.5 percentage points lower than last year's increase rate).
Looking at coal production in China, 3,955 coal mines were under construction or renovation in the country at the end of 2006, representing newly-added annual capacities of 705 million mt. Of these mines, 1,262 new-built mines accounted for 497 million mt of new capacities, 702 coal mines undergoing reconstruction and expansion constituted a further 138 million mt, 654 coal mines undergoing technological renovation represented 16 million mt of newly-added production capacity; and 1,337 coal mines undergoing resource integration accounted for a further 54 million mt. According to the official estimates, the total production capacity of existing coal mines and those under construction or renovation is expected to reach 3.136 billion mt in 2007. However, as the actual annual number of operating days at coal mines exceeds the number of days used for estimation purposes, the actual figure is likely to surpass the 3.26 billon mt. Some mines still have a relatively great incentive to surpass their original production plans. It is estimated that there is a production capability release of about 200 million mt in China's coal industry. Taking factors like technological improvements and elimination of dated production capacity into account, it is estimated that the coal market will have achieved overall new supplies of 238 million mt in 2007.
On the issue of coal transportation, with the expansion and revamping of main railway lines such as the Da-Qin Railway and the increased coal handling capacity of ports like Qin Huangdao, the transportation of coal from the main coal mining regions in northern China is rising dramatically, the coal supply in main coal consuming regions like eastern and southern China is also going up, while China's coal supply structure is changing gradually. It is expected that the transportation capability of the three main coal transportation lines - the Da-Qin line, the Hou-Yue line and the Shen-Shuo line - will increase by 85 million mt, and that the coal transfer capability of major ports, including the ports at Qin Huangdao, Tangshan, Huangye and Tianjin will go up by more than 30 million mt. However, supplies of coal to the market are likely to remain insufficient due to the relatively inadequate railway transportation capability and the ever-rising demand levels.
With regard to policy factors, new policy-related charges are likely to increase coal production costs dramatically. On 10th March 2007, the Shanxi local government announced the imposition of new charges linked to its establishment of a sustainable development fund for coal mining. The charges for the coal varieties were provisionally set at RMB 14/mt for steam coal, RMB 18/mt for blind coal and RMB 20/mt for coking coal. Different adjustment coefficients (1, 1.5 and 2 respectively) are determined according to mines' estimated production capacities. Other policies and rules in connection with the sustainable fund are to be introduced in the coming period, and are expected eventually to be introduced to the whole country. With mounting expenses such as resource compensation fees, exploration right costs and mining rights, safety fees, allowances for underground work and night duty, and the subsidy for meals during work, the production cost of coal will rise sharply. According to the preliminary calculations, the coal cost will go up by RMB 70-80/mt due to these additional charges.
Turning to China's imports and exports of coal, it is estimated that coal exports in 2007 will remain at around 53 million mt. On the other hand, China's coal imports will most likely be at a high level of around 50-53 million mt. For the whole year of 2007, exports and imports of coal will remain basically balanced. Looking at the coal import situation, as China reduced and canceled its import duty for coal and as domestic demand for coal has increased greatly, the country's coal imports have seen a strong increase. In January-September, the average prices for coal imported from Vietnam, Indonesia and Australia were $36.74/mt, $50.21/mt and $85.82/mt respectively. In view of the total import cost and the adjustment of coal varieties, Vietnam, Indonesia and Australia still remain the major coal exporters to China. Looking at the coal export situation, the sharp increase in international coal market prices provides momentum for steady coal exports from China. Up to the end of the current year, the global economy will maintain a trend of fast growth, with international trade and investment continuing to expand. The global economy will keep on developing rapidly while the demand for energy will not decline. In other words, a whole combination of factors will contribute to sustaining the rising trend in coal prices.
Summing up, it is estimated that the supply and demand of coal in China for the whole of 2007 will remain essentially balanced while the pressure of tight supplies will be more in evidence. Influenced by the increase trend in coal production costs and the strong market demand, coal prices will change in accordance with the supply-demand relationship and remain at high levels with slight fluctuations. With the international coal trade seeing increased activity and prices going up, domestic coal prices are likely to continue rising.