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 growt