Analysis of China coal market in 2006

According to the official data from the Chinese authorities, in the 1st half of 2006 supply and demand were generally balanced in China's coal industry, although the prices of certain types of coal dropped in some regional markets. While the demand from the major coal consuming industries still continued to increase, the rapid expansion of local coal supply and the remarkable increase in imports resulted in a situation of some oversupply. This trend seems to be continuing and even becoming more serious in the second half of the year. Supply China is the number one coal supplying country in the world. In recent years, due to the stable development of the Chinese economy, various industries needed an ever-growing coal energy supply - such as the electric power and steelmaking sectors, for example. As a result, China's coal supply expanded fast on account of the rapid increase in demand. The total output of coal was nearly 1 billion tons in the first half of 2006, with a growth rate of 8.3 percent year on year. Though the output continued to grow, its increase was down 1.4 percent compared to last year. The level of inventories in circulation level reached 153 million tons, increasing 9.4 percent on the end of last year. So far, fixed assets investment in coal mining is still increasing at high speed. Many coal mining projects of huge capacity are under construction, though the state has issued related measures aimed at limiting this trend. It is apparent that the effects of the government's policies are not always as good as expected. Demand The growth in domestic demand for coal has followed a low speed – high speed - super high speed – stable speed trend from 2000 on. Last year, the trend of increasing demand slowed down remarkably. The yearly growth rate was just 9 percent while the figure had been in two digits up to then. Entering 2006, this figure continued to decline. In the first half of the year, the turnover was 970 million tons with a growth rate of 4.4 percent year on year. Although the ratio of turnover to output at 98 percent was still at a high level, the market situation of lower demand for coal becomes more obviously evident day by day. The major reasons for the slowdown in demand are the increasing supplies from the local markets and imports, the restrained growth of high energy-consuming enterprises and the widespread use of energy-saving technology. Imports and exports Due to high local demand and the relatively high price levels, coal imports increased quickly in 2006. In late Sept., the local price of power coal was about RMB 460 per ton (freight excluded), i.e., $58 per ton, - higher than the imported coal from Australia by $10 per ton. Regarding exports, the ratio of these to local total output is only 3 percent at present. To protect energy resources, the Chinese government continued to reduce the export rebate of coal products. Currently, the export rebates of all coal products have been completely cancelled. Undoubtedly, this will lead to a further decrease in coal exports and an increase of supply in the local market. In conclusion, the coal price in the domestic market is generally on a downward slide. This is due to the more and more obvious oversupply trend and also due to the increasing fierceness in competition between the suppliers.