China is seeking major coal supplies from Indonesia, Vietnam, and elsewhere, while allowing some of

China is seeking major coal supplies from Indonesia, Vietnam, and elsewhere, while allowing some of the most dangerous mines in the world to continue operating on its own turf. Only last month 166 miners died in a blast in Northern China - the worst disaster of its kind in recent years.

China Fuels Surge In Coal Demand, Prices

Planet Ark (Reuters)

December 10, 2004

Hong Kong - China's hunger for coal to fuel its sizzling economy is leading the country to step up imports, transforming the once dirt-cheap commodity into the next black gold and pushing international prices up 50 percent this year.

The world's largest producer, China will also cut back exports of coal next year to meet rising domestic demand while it cracks down on unsafe mining after a series of fatal disasters.

China is the world's second-largest coal exporter, accounting for about 20 percent of world shipments. A cut in Chinese exports would drive up demand for Australian and Indonesian coal from large consumers such as Japan and South Korea.

"We have seen a lot of orders for imports from Indonesia and Vietnam to China next year," said a senior official at COSCO (H.K.) Shipping Co. Ltd., a unit of China's largest shipping group.

Coal provides up to 70 percent of China's energy needs. As its economy grows more than 9 percent this year, the world's second-largest energy consumer faces a power shortage and transport bottlenecks that could starve up to 200 million Chinese of the coal required to heat their homes.

Analysts said China's combined imports of thermal and coking coal were heading for 18 million tonnes this year, up 64 percent from 11 million in 2003.

With demand growing, the price of thermal coal used for power generation had risen 50 percent to more than $60 a tonne since the start of the year, analysts said. Term prices for coking coal, the form used in steel production, were set to almost double next year, to $100 a tonne or above from below $60 this year, they said.

Export Quotas

China remains a net exporter of thermal coal, which fires three quarters of its massive power industry. But it has switched to a net importer of coking coal, to help feed growth of more than 20 percent this year in what is the world's largest steel sector.

Analysts said net imports of coking coal to China would be about 5 million tonnes this year, climbing to 7 million in 2005. Historically, China has been a net exporter of about 10 million tonnes a year.

China has set its 2005 export quota, for thermal and coking coal combined, at 80 million tonnes, steady from this year but down from 93 million in 2003.

"So far I'm still looking at (exports of) 80 million tonnes. But it could be less, possibly down 10 percent," said Feng Zheng, a coal industry analyst at JP Morgan in Hong Kong. To discourage exports, Beijing might make further cuts to a value-added tax rebate on thermal coal exports, after trimming it to 11 percent from 13 percent this year. In May,

it scrapped a tax rebate on coking coal exports. Korea Electric Power Corp., which supplies more than 95 percent of South Korea's electricity, said this week it aimed to cut Chinese coal imports to 24 percent of its total imports next year from 44 percent currently.

JP Morgan's Feng said China's coal production would rise 11 percent to a record 1.84 billion tonnes this year, and by a further 10 percent in 2005.

But the strain on China's ageing coal mines has been catastrophic.

Beijing has announced plans to consolidate China's highly fragmented coal industry into around 13 large mines after explosions at the Chenjiashan mine in northern China killed 166 people on Nov. 28 -- the worst in a string of disasters in China's coal mining sector over the last few years.

Mine Safety

Domestic prices, 40 percent higher than a year ago, had led to the reopening of some small mines which had been previously closed on safety grounds, analysts said. Any crackdown on small-scale mining would have a major impact on China's coal output, they said, as these mines together account for around one-third of the country's output.

"China's coal industry is coping with a difficult balancing act," Wang Xianzheng, deputy director of the State Administration for Safe Production Supervision, told the China Business weekly.

While China has large reserves, low domestic prices before this year have starved the industry of investment in production facilities and safety.

"A large number of small mines are getting to the limit of their life. To replace them, they have to go deeper," said Michael Komesaroff, managing director of Australia-based consultancy Urandaline Investments.

"That requires more capital," he said. "It's going to take a little bit of time. You cannot suddenly turn on the tap and say 'let's start producing'."

Pu Hongjiu, vice president of the China National Coal Association, told the China Business weekly that about 50 billion yuan ($6.04 billion) was needed to improve mine safety.

(Additional reporting by Judy Hua in Beijing and Charlie Zhu in Singapore)