Chinese coal and the business card paradox
Something was different at this year’s McCloskey Asia-Pacific Coal Summit, says Michael Parker at Bernstein: Maybe it was the change of venue from Dalian to Beijing, but attendance by local Chinese participants was down and stage-rushing at the end of each presentation to hand out business cards was down too. For an industry that is in the midst of another year of record high prices, the mood was, well, down.One relatively subdued conference does not necessarily herald winter for traded coal. But it’s not just that coal prices are at record levels; the industry is also seeing a lot of M&A activity, too. As the WSJ’s Heard on the Street notes:
Total deal value so far this year, at nearly $19 billion, is already close to last year’s $22 billion total…. The attraction of coal assets has increased partly due to rising imports from China over the last two years.
Indeed – never mind the fights over western companies such as Macarthur Coal; China is also directly buying into producers in Mongolia and Indonesia.
So, what’s with the ‘down’ mood?
As with much of China’s economy, it’s difficult to say. But China’s hunger for coal imports is a curious thing. The country only became a net importer of coal in the last two to three years – after all, it has plenty of its own coal reserves. However many of its coal mines were small, dangerous and inefficient, and beset by logistical challenges getting the stuff from north-western mines to the big centres of demand in the south.
Parker quotes 10 Chinese officials from various state-owned enterprises, industry groups and government agencies – with nary a signal that demand growth for either coking or thermal coal would continue the kind of growth trajectory seen recently. The 12 per cent growth in electricity demand seen so far this year would fall in the fourth quarter and continue falling over the next few years; while steel demand was also expected to slow.
Zheng Chunyu, Deputy Chief Engineer of the China Metallurgical Industrial Planning and Research Institute (CMIPRI) and a representative from Shanxi Coking Coal Group both believed that the “opening of the red door” effect, where new projects are typically commissioned in the first year in a new five-year period, will subside and power consumption growth will normalize. Mr. Zheng from the CMIPRI believes that there’s a risk of overcapacity in steel due to the fragmented market, and given a GDP growth of 8-9% during the twelfth five-year period, steel consumption growth would be on average ~2-4%.
Parker is not so sure, as the steel production growth to GDP multipler between 2007 and 2010 was 1.0.
However, Mr. Zheng sees less opportunities in the steel industry, since highways are already well developed, high-speed railroad investments is slowing, and the property market is being controlled by thegovernment. The only remaining opportunity that Mr. Zheng recognizes for growth may be city rail systems. The representative from Shanxi Coking Coal Group also expects a slowdown in the steel market, however he believed that growth would be ~7-9% in the twelfth five-year period, less pessimistic than the CMIPRI.
Meanwhile there were arguments of falling demand on the thermal side, too – the China Electricity Council official pointed to the energy- and carbon-intensity targets in the 12th five-year plan, while a representative of Shaanxi Coal and Chemical Group mentioned the inevitable development towards a less resource-intensive economy.
Other factors mentioned by both Parker and some of the Chinese officials are the development of coal rail networks. There is much focus on problems getting coal into Qinhuangdao – due for completion by 2014 – and other north-eastern ports, which Parker believes is overplayed. This is partly because China already has extensive coal-dedicated rail networks which are being incrementally upgraded all the time, and partly because Qinhuangdao perhaps isn’t so significant, with only eight per cent of Chinese coal produced passing through the port. Meanwhile, China’s own coal production capacity is increasing rapidly.
Another “unknown unknown”, as Parker puts it (although surely this qualifies as a known unknown), is coal quality – and how fast it is deteriorating:
The simple answer is that – as with all extractive industries – the good stuff goes first meaning resource quality is deteriorating all the time. However, trying to understanding whether the current level of coal quality decline is significant and/or accelerating is a question to which it is always difficult to get a straight answer.
Total deal value so far this year, at nearly $19 billion, is already close to last year’s $22 billion total…. The attraction of coal assets has increased partly due to rising imports from China over the last two years.
Indeed – never mind the fights over western companies such as Macarthur Coal; China is also directly buying into producers in Mongolia and Indonesia.
So, what’s with the ‘down’ mood?
As with much of China’s economy, it’s difficult to say. But China’s hunger for coal imports is a curious thing. The country only became a net importer of coal in the last two to three years – after all, it has plenty of its own coal reserves. However many of its coal mines were small, dangerous and inefficient, and beset by logistical challenges getting the stuff from north-western mines to the big centres of demand in the south.
Parker quotes 10 Chinese officials from various state-owned enterprises, industry groups and government agencies – with nary a signal that demand growth for either coking or thermal coal would continue the kind of growth trajectory seen recently. The 12 per cent growth in electricity demand seen so far this year would fall in the fourth quarter and continue falling over the next few years; while steel demand was also expected to slow.
Zheng Chunyu, Deputy Chief Engineer of the China Metallurgical Industrial Planning and Research Institute (CMIPRI) and a representative from Shanxi Coking Coal Group both believed that the “opening of the red door” effect, where new projects are typically commissioned in the first year in a new five-year period, will subside and power consumption growth will normalize. Mr. Zheng from the CMIPRI believes that there’s a risk of overcapacity in steel due to the fragmented market, and given a GDP growth of 8-9% during the twelfth five-year period, steel consumption growth would be on average ~2-4%.
Parker is not so sure, as the steel production growth to GDP multipler between 2007 and 2010 was 1.0.
However, Mr. Zheng sees less opportunities in the steel industry, since highways are already well developed, high-speed railroad investments is slowing, and the property market is being controlled by thegovernment. The only remaining opportunity that Mr. Zheng recognizes for growth may be city rail systems. The representative from Shanxi Coking Coal Group also expects a slowdown in the steel market, however he believed that growth would be ~7-9% in the twelfth five-year period, less pessimistic than the CMIPRI.
Meanwhile there were arguments of falling demand on the thermal side, too – the China Electricity Council official pointed to the energy- and carbon-intensity targets in the 12th five-year plan, while a representative of Shaanxi Coal and Chemical Group mentioned the inevitable development towards a less resource-intensive economy.
Other factors mentioned by both Parker and some of the Chinese officials are the development of coal rail networks. There is much focus on problems getting coal into Qinhuangdao – due for completion by 2014 – and other north-eastern ports, which Parker believes is overplayed. This is partly because China already has extensive coal-dedicated rail networks which are being incrementally upgraded all the time, and partly because Qinhuangdao perhaps isn’t so significant, with only eight per cent of Chinese coal produced passing through the port. Meanwhile, China’s own coal production capacity is increasing rapidly.
Another “unknown unknown”, as Parker puts it (although surely this qualifies as a known unknown), is coal quality – and how fast it is deteriorating:
The simple answer is that – as with all extractive industries – the good stuff goes first meaning resource quality is deteriorating all the time. However, trying to understanding whether the current level of coal quality decline is significant and/or accelerating is a question to which it is always difficult to get a straight answer.
The investment into alternative power generating technologies such as nuclear energy may need to be measured against the potential cost when things turn against you as unfortunately happened this year in Japan. Coal prices and coal statistics show developing economies are more likely to increase their investment into & their use of coal mining in coming years because of coal's affordability and ability to quickly meet increasing demands for electricity and steel. www.coalportal.com
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