By Dr. Syd Peng
The U.S. Energy Information Administra-tion (EIA) forecast in 2012 the U.S. would produce 996.7 million tons of clean coal, 97.6 million tons or 8.91% less than 2011, and that consumption for coal-fired electricity generation would be 808 million tons, 120 million tons or nearly 13% less than 2011 due to rising coal stockpiles from a mild winter, greater use by electrical utilities of inexpensive natural gas, and uncertainty in federal regulations. Against this unprecedented adverse environment, there has been a lot of talk in the media in the last few months about exporting excess coal to the energy-hungry Asian market, especially China to compensate for the shortfall of U.S. consumption. Is that a viable strategy, short- and long-term?
China is estimated to produce and consume 3.6 billion raw metric tons (mt) of coal in 2012. About 64% of the production was from the north central region notably Inner Mongolia, Shanxi and Shaanxi (the Red Zone in Figure 1), which are located far from the central interior and in particular southeast coastal regions where electricity is in great demand due to greater concentration of population and industry. A portion of the coals produced in this region were either trucked in short or long distances to the consuming interior regions. And, close to half of the total production is moved by a combination of trucks and railroads to the port city of Qinhuangdao on the Gulf of Bo Haiin on the Pacific Coast. From there it is then loaded on ships to the southern port cities like Shanghai, Ningbo, Xiamen and Kuangzhouor upstream through the mighty Yangtse River to the central interior of Hubei and Hunan Provinces. These coal transportation routes represent the great majority of coal movement in China. Obviously it is by any measure a very long haul and adds considerable cost to the consumers in the populated and industrialized southeastern coastal region. Therefore, Qinhuangdao is a trend setter and a barometer for the state of the Chinese coal industry.
When it comes to trucking Chinese coals, the scale in the Inner Mongolia region is really beyond imagination. One county in the province-line between Hubei and Inner Mongolia has more than 20,000 50-ton coal trucks. They are painted bright red. Long caravans of these red coal trucks stretch bumper-to-bumper for up to several miles on the Jin-Zhang Expressway (Beijing-to-Lasa, Tibet). Passenger cars traveling on this section of the expressway are very stressed and extremely slow. Those long lines of bumper-to-bumper red trucks are a magnificent sight if you are not in a hurry to get to your destination.
China’s coal markets experienced a very depressing decade in the 1990s. The last 10 years, however, are often referred to as coal’s “Golden Ten Years” due to the ever rising coal prices. During this “Golden Ten Years,” investing and engaging in coal mining has been very popular and many “coal barons” emerged. In recent months, however, there have been frequent reports that the “Golden Ten Years” may soon end. Beginning in April 2012, especially since May, coal prices have been declining across the board continuously for the past nine weeks, although there have been signs of a bottom in recent weeks.
At Qinhuandao, coal stockpiles have reached 9.42 million mt (maximum capacity is 10.425 million mt) in early June, exceeding the record set in November 2008 at the height of the world recession, and increasing at the rate of 800,000 mt/week. Even after special measures were implemented to relieve the stockpiling, the stockpile remained at 877 million mt level in early July. Ships are rarely seen at the port and many sales and ocean shipping contracts were not honored. Meanwhile stockpiles of the electric utilities in the consuming regions reached a new high of more than 33 days—nearly twice the normal inventory. Stockpiles are also high at many mine sites. Under normal conditions, all domestic coals reaching Qinhuangdao are quickly reloaded onto waiting ships that depart immediately for the southeastern coastal region or central interior. Undoubtedly Qinhuangdao is the largest coal port in the world, shipping 250 million mt annually.
There are reports that coal mines in Inner Mongolia and Shanxi are reducing or idling production, and lowering wages due to the drop in coal demand. There are several reasons for declining consumption: (1) The central government implemented policies to tame inflation, thereby slowing the rate of economic growth that affected all manufacturing industries; (2) Recession in the Euro zone that accounts for about one quarter of China’s export market causes idling or closure of many factories that are the major consumer of electricity. Coal-fired electricity power plants consume more than 50% of coals and account for 80% of its fuel; (3) Unusually wet season in the south that prompted more generation and use of hydro power: and (4) Cheap imports of coals from Australia, Indonesia and the U.S. There are reports that U.S. coal companies due to reduced domestic consumption are selling cheap to gain export market. One story stated that the Powder River Basin (PRB) coal FOB at a Chinese port was $75.20/ton, $55/ton less than the domestic coals. Similar cases have also been reported for Australian coals.
Chinese coal imports increased steadily in recent years (See Figure 2), due to a combination of the following factors: (1) the huge profits resulting from the “Golden Ten Years” attracted many investors including power generators, which contributed to rapid growth in production that did not foresee the recent decrease in demand, resulting in oversupply and causing steam coal price to decline rapidly, and (2) inflation and increases in taxes and fees, and elimination of import taxes on lignite (now all types of coals are import-tax free) have created a cost structure for China’s domestic steam coals that is inferior to that of foreign coals. Simultaneously, in the world coal trade market, due to recession in the Euro zone, recent sharp decline in oil prices (because the coal price in international coal trade follows closely the up and down cycle of oil price), and energy consumption less than expected in the rapidly increasing energy consuming countries such as China, India and South Africa, world coal production has also exceeded demand causing coal price to slide dramatically. As a result, coals imported into China from Australia, Indonesia and even the U.S. are cheaper in the southeastern costal region than the domestic coals from the north.
At the 10th China International Coal Conference held in Beijing, April 17-19, 2012, many Chinese coal dealers signed sales contracts with brokers from Australia, Indonesia, Russia and the U.S. for import varying from 1 million mt to 10 million mt for delivery in the May-July period to meet the expected summer’s surging demand. Unexpectedly within two months the price of coal dropped considerably and port stockpiles approached all-time highs. As a result, contract defaults have occurred and delay of delivery has been requested. The situation may derail the total amount of coal imports previously estimated.
The high-quality met coals on the other hand are scarce and traded among small numbers of players. Consequently, supply and demand are more easily adjustable. Their price remains stable and firm.
Obviously, simple supply and demand dictates that if the cost of domestic coals at the consuming regions is cheaper than or equal to that of import coals, imported coals will lose price advantage and import will decrease rapidly. When will this happen or will this ever happen? As expected, there are different opinions: The most optimistic one being that the amount of coal import even at an estimated 250 million mt in 2012 is minor considering the total consumption of around 3.6 billion mt. The opposite view is that production costs are usually in the range of $24-48/mt and that it may be difficult to reduce that cost to sell it cheaper than the foreign import at the coastal region. Consequently, importing lower priced foreign coals can curtail the continuing price increase of domestic coals. Conversely, if the import coal price rises following the recent rise in oil price, the price differential between domestic and import coals shrinks leading to slow down in import. In addition, coal consumption depends on GDP growth: since the 2012 rate of GDP growth in China is 7.5% vs. 9.2% in 2011 and 10.4% in 2010, the current situation may persist until the rate of GDP growth is allowed to move upward. Therefore, it is probably correct to say that lacking consistent data, coal import will continue to increase well into 2013.
Taking all of that into consideration, it must be pointed out that in a centrally-controlled market economy, a new or change in government policy can be implemented anytime to change the trends quickly. For instance, the Ministry of Transportation is considering a proposal to control the “unusually large increase in coal import” within the framework of world trade agreement because large stockpiles of coals at sea ports for an extended period are liable to safety hazards such as spontaneous combustion and coal pile stability.
Peng, a professor from West Virginia University’s Mining Engineering department, has spent the last few summers lecturing in the heart of Chinese coal industry and filed this report recently from China. He can be reached at: Syd.Peng@mail.wvu.edu.