China's coal: The
other black gold By Scott B
MacDonald
When the term "black gold" is
used, it usually pertains to oil. Coal, one of the
oldest sources of energy used by man, has long
been a poor cousin. However, in an era of higher
oil prices and apprehension over future supply,
coal no longer looks so bad.
This is
certainly the case in China, where the industry is
beginning the process of a major overhaul.
According to the Organization for Economic
Cooperation and Development (OECD), the Chinese
economy has expanded at an average of 9.5% over
the past two decades and "seems likely to continue at
that
pace for some time". To maintain that pace of
growth, China must tap all of its energy
resources, including coal.
China is the
world's largest producer of coal. While a small
amount of that coal reaches foreign markets, most
of it is destined for use at home. Indeed, coal
accounts for roughly two thirds of China's energy
needs.
And demand for coal has only
increased over the past few years. Wholesale coal
prices (which have been deregulated) rose 40% in
2004, pushed along by world market prices and a
56% rise in electricity demand between 1999 and
2003. These rapid increases in demand are not
expected to stop any time soon. According to the
China Electricity Council, power consumption in
China may rise 11% next year, to 2.73 billion
megawatt-hours.
Although China's coal
sector has played an important role in the
country's industrialization, it has been a very
fragmented business, filled with inefficiencies.
At a time of very strong demand, these
inefficiencies are constraining the country's
growth potential - old and unsafe mines waste
capital and labor, while transportation systems
are inadequate for getting get coal to factories
and electrical utilities.
Furthermore, the
unsafe nature of older mines has made China's coal
industry one of the most dangerous in the world.
According to official sources, around 6,000 miners
are killed a year in the coal industry, usually
due to gas leaks. According to the official Xinhua
News Agency (October 14, 2005), the coal industry
suffered 2,357 accidents that killed 4,226 people
between January 1, 2005 and September 30, 2005.
But change is coming to China's coal
industry. The pressing demand for steady sources
of energy is forcing Beijing to tighten
regulations (by ordering the closure of small
unsafe mines, for example), curtail the ownership
of officials in the sector, and push for
consolidation. And consolidation is critical if
the coal industry is to support the country's
economic growth over a sustained period.
The top ten coal mining groups make up
just 15% of the country's production capacity. At
the same time, smaller mines accounted for 38% of
coal production in 2004. This is hardly an
efficient system. In most other major coal
producing countries, production is much more
concentrated in the upper echelon of companies.
Consequently, Beijing announced that it plans to
form six to eight large coal-producing groups,
each with the capacity of more than 100 million
tons per year. Along these lines, in December
2004, Heilongjiang Long Mei
Mining Group was formed by the merger of four
large coal mines. The enlarged firm is now
considering an overseas listing.
China has
another reason to consolidate the coal industry -
pollution. As the 2005 OECD study on China noted:
"The major environmental problem is air pollution
that stems from the use of a coal supply [with]
relatively high sulfur content." Using coal in a
less polluting manner is possible, but this
requires capital that small enterprises do not
possess.
The coal industry in China as it
stands today will not be the same in five years.
The sector will be more driven by market forces as
the state retreats from ownership, and foreign and
Chinese private sector ownership becomes more
pronounced. The number of companies will shrink
and the technology will improve. And demand (which
may slump in the short term) will continue to be a
strong factor considering China's need for further
economic growth. For the shrewd international
investor the coal sector should be worth watching.
There is one listed Chinese coal company on the
NYSE, Yanzhou Coal Mining - YZC. We expect more to
come.
Scott B MacDonald is
senior managing director at Aladdin Capital and a
senior consultant at KWR International.
(Posted with permission from KWR International,
Inc, (KWR), a consulting firm
specializing in the delivery of research,
communications and
advisory services.)
