Chinese Coal Imports Surge

Industrial Metals

Chinese coal imports continue to rise despite continued high metallurgical and thermal coal prices. High transport costs and low coal quality have lead China abroad to meet booming demand.

By James Wellstead – Exclusive to Coal Investing News

Chinese coal imports continue to rise on strong demand, despite continued high met and thermal coal prices. While China has one of the world’s largest reserves of coal, high transport costs and low coal quality have increasingly force China to seek international suppliers to meet booming coal demand.

July coal imports in China surged by 36 percent to 17.53 million tonnes, topping the previous record of 17.34 million tonnes in December of last year. The increase comes on the back of the largest energy shortages in seven years in China as the country continues to struggle to quench its growing thirst for coal. As a result, the growing demand from Chinese coal imports (China became a net importer of coal in 2009) to meet this need carries significant weight in setting world prices, an impact which is set to increase.

To put China’s demand in perspective, in 2010, China alone accounted for 48 percent of global market volume, up from 45 percent in 2009. Worldwide global coal demand is set to increase by 55 percent between 2007 and 2035 with non-OECD Asian countries (including China and India) will account for 95 percent of the projected increase in world coal consumption.

For 2011, China’s projected coal demand growth rate is expected to be 9.7 percent, with a longer term growth rate of between of between 5 and 8 percent (depending on estimates). This means China would double its demand for metallurgical and thermal coal in less than ten years, taking total consumption to over 6 billion tonnes per year. While imports currently constitute a small percentage of total coal supply, about 5 percent or 150 million tonnes in 2011, congested transit systems have and high transport costs are set to be a decisive factor in determining the contribution imports will make in China’s coal supply.

Transport Costs

Rail, truck and ocean transit are the crucial components in supplying Chinese coal within its own market. With much of domestic coal resources located in North-Central China (predominantly Shanxi, Shaanxi and Xinjiang provinces) and major industrial demand hubs located along the southeastern coast, transport costs currently make up more than half of delivered costs for domestic thermal coal in the southern provinces.

Increasingly high transport costs, in concert with the increasing cost of sourcing typically low quality, underground coking and thermal coal from within the country pushed China from a net coal exporter into an importer in 2009. Despite vast distances of suppliers from Australia, Canada, Indonesia and the US, lower production costs sourced (typically) from surface miners have been able to supply Chinese customers at a lower cost.

Import estimates exaggerated?

While imports are currently on the rise, officials from Deutsche Bank stated that “owing to ongoing improvements in China’s rail capacity and production increases particularly in Shanxi and Inner Mongolia,” claims of thermal coal imports doubling to 200 million tonnes by 2015 are unfounded. Instead, “net imports of thermal coal will remain stable just above the 100 million-tonnes level, instead of rising significantly in the next five years,” Deutsche Bank officials continued.

However, such projections were not supported by Hao Xiangbin, a senior official with the China Coal Industry Association, who felt that the planned VAT and port fee reductions will be necessary to encourage coal imports to meet rising demand, projected at 3.73 billion tonnes for 2011.

Regardless the exact figure, imports will be necessary to meet Chinese thermal and coking coal demand. Steven Feldman of SouthGobi Resources (TSX:SGQ) stated in an interview with Coal Investing News that while Chinese rail infrastructure in the north is currently sufficient to handle growing demand, “China has diminishing sources of high calorific, shallow coking coal.” Further, Feldman explained that costs aging and increasingly deep mines create environmental and operational costs that make Chinese sourced coal less competitive.

As a result, low cost coking and thermal coal from Mongolia, Australia and even Canada will remain attractive sources to many Chinese customers. Recent news of rising thermal prices this July due to rising freight costs of as much as 3 percent in transit from China’s leading coal port Qinhuangdao, gives greater importance to the decision to reduce value-added tax and port charges (more than 20 percent of the final cost). These dynamics, principally the question of transport development and capacity, will continue to play a deciding role for Chinese coal imports.

Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.

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