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					Coal


       Jason Zhong
       Ron Huang
                Introduction
•   Coal is a nonrenewable energy source.
•   It’s a combustible black or brownish-black rock
    composed mostly of carbon and hydrocarbons.
•   However, It’s relatively cheap and abundant
    than crude oil and natural gas.
•   At current production levels, coal reserves are
    estimated to last 155 years. In contrast, oil and
    gas reserves are equivalent to around 41 and
    65 years at current production levels
    respectively.
                 Introduction
• Coal is used mainly in electricity, in industry, and
  in the manufacturing of steel.
• 68% of total global steel production relies
  directly on inputs of coal. Some steel production
  relies on electric stove which is indirectly
  required the inputs of coal to create electricity.
• There are many types of coal; different countries
  have different standard in classifying coal in
  terms of its content.
• Lignite, sub-bituminous, and bituminous coal are
  commonly being used as fuel for steam electric
  power generation.
          Project Objective
•   We would like to illustrate that cheap and
    nonrenewable energy, such as coals are
    increasingly important in China as crude
    oil and natural gas price surge by the
    following perspective:
     1. Valuation
     2. Cost (ex: total investment cost,
        transportation cost)
Coal Production and Consumption
            In China
• The following charts have been collected
  from China statistics that give you a
  general idea on:
  – How much coal are represented the
    percentage of total energy production and
    consumption in China?
  – What’s the exact number of coal produced
    and consumed in China?
  – What’s world position of China’s coal industry
    in terms of producers and consumers?
  As Percentage of Total Energy
           Production
78%

76%

74%

72%
                             % of Coal
70%                          Used out
                             of Total
                             Energy
68%                          Production

66%

64%
    78
    80
    85
    89
    90
    91
    92
    93
    94
    95
    96
    97
    98
    99
    00
    01
    02
    03
    04
    05
 19
 19
 19
 19
 19
 19
 19
 19
 19
 19
 19
 19
 19
 19
 20
 20
 20
 20
 20
 20
As Percentage of Total Energy
        Consumption
78%
76%
74%
72%
70%                      % of Coal
68%                      out of Total
66%                      Energy
                         Consumption
64%
62%
60%
 19 78
 19 80
 19 85
 19 89
 19 90
 19 91
 19 92
 19 93
 19 94
 19 95
 19 96
 19 97
 19 98
 20 99
 20 00
 20 01
 20 02
 20 03
 20 04
    05
 19
     Why Less Consumption?
• It’s reasonable to believe that the Growth of
  overall consumption on total energy in China
  increases every year. Why coal consumption
  decreases over the year from 1985 to 2005?
• We believe the percentage on the chart is
  misleading. Percentage on coal consumption of
  total energy decreases, but the total amount of
  coal consumption didn’t decrease.
       Why Less Consumption?
The following is an example:

10 years ago:
  – Total Energy consumption = 1000 million tons
  – Total coal consumption = 750 million tons
  – % of coal used on total energy = 75% (750/1000)
Now:
  – Total Energy consumption = 2000 million tons
  – Total coal consumption = 1400 million tons
  – % of coal used on total energy = 70% (1400/2000)
              Total Coal Production
                        &
        Total Coal Consumption In China
                  (1990-2005)

Year               1990     1995     2000     2003     2004     2005


Total Coal
Production      102221.0 133461.7 128297.1 163402.0 192265.5 214462.1
(10,000 Tons)
 Total Coal
Consumption     105523.0 137676.5 132000.0 169232.0 193596.0 216557.5
(10,000 Tons)
  Top Ten Coal Consumers
Countries, 2004( in million tons)
Top Three Coal Producers
     (in million tons)
Coal, Oil, and Gas Price
     ($us per tons)
             Observations
• For many years, China relied heavily on coal as
  source of cheap energy. Even without gas or
  crude oil, Chinese light is still able to keep
  sparkling.
• For many years, total consumption on coal has
  always exceeded the total production of coal,
  because production capacity has always been
  controlled by the government, and they also
  import coal from other countries.
• Not only China is the largest consumers of coal,
  but they are also the largest producers of coal.
     Does coal help reduce world
             inflation?
• Most Importantly, coal is good for smoothing
  worldwide inflation rate.
• If China uses crude oil or natural gas as a
  source of energy to produce the product to the
  importing countries, consumers from the
  importing countries will have to pay more for
  their products.
• On the other hand, if China uses coal as a
  source of energy to produce products,
  consumers from importing countries will pay less
  for their product, because coal is relatively
  cheaper than crude oil and natural gas.
                     Valuation
1.   There is a strong Demand for Coal; China’s GDP is
     predicted to grow at 9 -10% through 2008 and 2009.
     Coal is still deemed to be the cheapest sources of
     energy comparing to crude oil and natural gas. It
     makes more economic sense to use even more coal.

2.   Information Theory: Most of us may aware of the crude
     oil prices more than coal prices, because there are
     much more media coverage on crude oil than coal.
     Base on the information theory, the more people know
     about the investment, the return will be less. However,
     if the information is known to a few, the return on
     investment will be high. Example: Mongolia Energy
Mongolia Energy (0276.hk)
         Investing Strategy
• Invest in long position on companies that
  are not popular now, but they will be
  popular in the future. Don’t worry if the
  company is not making money in the short
  run. For example, the U.S has the biggest
  reserve of coal in the world. U.S coal
  companies will be a good investment
  when crude oil went out soon.
           Investing Strategy
• If you are risk averse, maybe the following
  strategy will be interesting to you.
• Maybe in the next two years, you have
  accumulated some funds for investing, but you
  don’t have the time to follow the market.
• You can invest your money in low risk stock,
  such as financial institutions, and most of them
  do pay dividends. Once you think you have
  earned enough dividend, you can use the
  dividend to buy very risky penny stocks, such as
  Mongolia Energy.
                      Valuation
3.   Sustainability: Crude oil’s reserve is equivalent to 41
     years at current production level. In the next two to
     three decades, we believe the supply of crude oil will
     be much more intense. When crude oil is pretty much
     gone, coal will be the next popular source of energy.
     As a result, coal in the long run will have much more
     sustainability than crude oil, because coal’s reserve
     will last for 155 years.

4.   Thousands of illegal coal mines are still operating in
     China. Is the Chinese coal business profitable, so that
     attracting more competition? If someone is
     participating in illegal activities, the reward or return
     must be greater than the risk of being caught or else
     no one is going to do it.
Coal-fired, Wind, Nuclear, and
         Water power
Consumption of a few main source
      of energy in China
    Which one is more expensive?
•    We believe coal is still the cheapest
     source of energy to generate electricity.
     Let’s look at different type of methods in
     generating electricity!
      1. Hydropower: use only locally and difficult to find
                      an ideal location to build a dam.
      2. Nuclear Power: relatively new technology to
                      china and high investment cost.
      3. Wind Power: relatively new technology and
                     provide very low magnitude of
                     electricity, the highest cost per kwh
       Cost Structure Summary
• The following tables are assumed that the different type of
  power plant can provide 100,000 kwh.

                   Total Cost to Build          Cost per kwh
                              ($ Yuan)               ($Yuan)

 Coal-Fired                 0.5 billion   0.25 to 0.3 cents

 Wind Power           0.8 to 1 billion     0.5 to 0.6 Cents

 Hydropower                 0.7 billion    0.2 to 0.3 Cents

 Nuclear Power             > 3 billions 0.41 to 0.45 Cents
      Three Gorges Dam example
•   “Three Gorges Dam” is the biggest hydropower in
    China, and it’s also the biggest construction project
    since the “Great Wall”. It’s power generation is equal to
    18 nuclear power station, and it can satisfy 5% of the
    Chinese population.
•   What’s the Cost of it?
       • The project will take 16 years from 1995 to 2011.
       • In 2008, the estimated total investment cost is
          will be greater than 180 billion ($ Yuan).
       • >1 million local residents had relocate.
       • Can they build another one like this?
Transportation Cost
          Transportation Cost
• After coal is mined and processed, it is ready to
  be shipped to market. The cost of shipping coal
  can cost more than the cost of mining it. It’s
  important to discuss the transportation cost.

• Most coal is transported by train, and all trains
  use in transporting coal in China are also using
  coal as a source of energy. About 70 percent of
  coal in the China is transported by train.
  Sometimes, coal-fired electric power plants are
  built near coal mines, and railway station to lower
  transportation costs.
Shenhua’s Asset Location
  (1088.hk, 601088.ss)
SHENHUA ENGY
Location of All Coal Mines in China
Location of all railway in China
Location of All Major Industries in
              China
Location of All Major Ports in China
              Observations
• At this point, we believe that transportation
  cost on coal is still very cheap, because all
  major coal mines are concentrated relatively
  close to major industries, ports, and efficient
  railway.
• Chinese Ministry of the Railway said Beijing
  plans to invest 1.25 trillion Yuan (U.S $160b)
  by 2010 on track, trains and civil engineering.
  It will make transportation and exploration
  much easier.
               Summary
• Coal is a nonrenewable energy, and it will
  only be less and less. It took 300 million
  years to form, but probably we will finish
  them in the next 155 years. However, we
  believe that coal has much more
  sustainability than crude oil. Once crude
  oil is gone, coal will be the next major
  source of energy.
• invest in the long-term!
Questions & Answers

				
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posted:11/21/2012
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