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2010 China Coal Market Outlook_ppt_

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					Chinese Coal Market Trends and Outlook


               May., 2010



               David Fang
                      Agenda
I. Coal Market Overview and Outlook

II. Coal Mine Consolidation and Transportation Bottleneck

III. Driving forces of China’s Shift to a Net Coal Importer
I. Coal Market Overview and Trends


(I) Coal Market Overview

 1. Chinese coal production surging 29.3% in 1Q2010
According to CNCA, China produced 737 million tons of raw coal, surging
29.3% YoY. Low base figures in 1Q2009 caused a surge in raw coal
production in 1Q2010, this rapid growth may not be sustained in the coming
months. The two-month nation-wide mine safety inspection and the on-going
coal mine consolidation campaign in Shanxi, Henan and other provinces will
constrain national production growth. Coal output is expected to grow 8 pct or
so to approximately 3.3 billion tons in 2010.
                         China's Coal Production for 1Q 2010
                900
                800     737                                                 Production
                700
                600
 million tons




                500
                                 YoY 29.3%
                400
                300
                200                            160.5                  153
                                                        YoY                     YoY 17.9%
                100                                     45.85%
                 0
Source:CNCA           National                 Shanxi            Inner Mongolia
China’s coal production has risen by about 200 million tons every
year since 2003 as shown in the chart below, but the production
growth has slowed down. If we consider “hidden production loss”
from small mines especially in 2009, the production growth might be
very moderate.
                                   China's Coal Production for 2003-2010
                4,000                                                                                      30
                                                     Production
                3,500                                                                             3,300
                           24.62                     YoY(%)                             3,049              25
                3,000                                                         2,802
                                                                     2,523
                                                                                                           20
 million tons




                2,500                                   2,325
                                             2,110
                                   1,956
                        1,736




                                                                                                               %
                2,000                                                                                      15
                                      12.7
                1,500                                         10.2               11.1
                                                                                           8.84            10
                1,000                                                   8.5                          8.2
                                               7.9                                                         5
                 500
                   0                                                                                       0
                        2003       2004      2005        2006        2007     2008      2009      2010
Source:NBS
As the largest coal-producing province over the years and the largest coal
supplier in China (about 45 % of China’s total cross-province sales),
Shanxi plays a key role in securing domestic coal supply. Its production
grew very slowly in recent years, if we consider “hidden production loss” of
estimated 150-200 million tons from small mines in 2009 due to the
consolidation-driven closure, the drop might be quite significant in 2009.
                     Coal Production in Shanxi Province for 2004-Q12010
               8                                                                                              14%
                                  11.70%                               6.55                                   12%
               7                                        6.3                          6.15                     10%
                      10.20%                5.82
               6               5.54                           8.20%                                           8%
                   4.96
million tons




               5                                                                                              6%
                                                5.00%                     3.90%                               4%
               4
                                                                                                              2%
               3                                                                                              0%
               2                                                                                              -2%
                                                                                                      1.61    -4%
               1
                                                                                            -6.10%            -6%
               0                                                                                              -8%
                   2004        2005         2006        2007           2008         2009             1Q2010

                                      Total Output                                YoY(%)

                                                                      Source: Shanxi Coal Industry Bureau
Shanxi’s coal production rebounded to the monthly average level of 60 million
tons in 4Q2009, after closed mines were gradually reopened. This level shall
be sustained this year. Consolidated mines whose production capacity is
estimated at 200 million tons may remain to be reopened. The consolidation
process may last for 3 years or even longer time according to source with
Shanxi Coal Industry Bureau.
                              Monthly Shanxi Coal Production for 2009-Q12010
               8000

               7000      Production
                                                                                         6132 6297 6104
                                                        5792 5906 5802     5722 5881                              5908
               6000
                                                 4897
million tons




               5000                                                                                        4505
                                          4209
                             3720 3951
               4000   3341
               3000

               2000

               1000

                 0
                      Jan., Feb.   Mar.   Apr. May.     Jun.   Jul.   Aug. Sep.   Oct.   Nov.   Dec. Jan., Feb.   Mar.
                      2009                                                                           2010
2. Strong economic recovery strengthening coal demand


  According to our estimates, coal consumption in the four industries totaled 701
  million metric tons, staging a rapid growth due to strong economic recovery in
  1Q2010. The power sector is the largest coal-consuming sector, accounting for
  roughly 50% of China’s total coal consumption. Strong rebound in heavy
  industries and severe drought in southwestern China might be major driving
  forces of power consumption in 1Q2010.
Coal consumption by industries for 2009


             Breakdown of Coal Consumption by Industry for 2009

              17%

    4%

                                                     49%


                                                        Power
   14%                                                  Steel
                                                        Building materials
                                                        Chemicals
                16%
                                                        Others


                                                           Source: CNCA
Coal consumption by industries for 1Q2010

                     Coal consumption by industries for 1Q 2010
               500
                      440
               450                                                         coal consumption
               400

               350

               300
million tons




               250

               200

               150                     136

                                                             89
               100           YoY              YoY
                             22.0%            22.3%                  YoY            36       YoY
                50
                                                                     15.3%                   6.1%
                 0
                     Power            Steel           Building materials         Chemicals


                                                                                  Source: CNCA
3. Lower coal stocks supporting coal prices during the traditional slack season


            Coal stocks at China's major power plants for 2010 (Unit: 10,000 metric tons)
  5000

                                                                                   coal stocks of power plants
  4800


  4600


  4400


  4200


  4000


  3800



                                                                           Apr.4




                                                                                              Apr.11




                                                                                                             Apr.19
          Mar.3




                        Mar.7




                                     Mar.14




                                                 Mar.17




                                                              Mar.24




                                                          Source: Zhong Neng Power Industry Fuel Co.
              Coal stocks at QHD port for 2008 - 2010 (Unit: 10,000 tons)
1000
       2008
 900   2009
       2010
 800

 700


 600

 500


 400

 300
        1
        2
        3
        4
        5
        6
        7
        8
        9
       10
       11
       12
       13
       14
       15
       16
       17
       18
       19
       20
       21
       22
       23
       24
       25
       26
       27
       28
       29
       30
       31
       32
       33
       34
       35
       36
       37
       38
       39
       40
       41
       42
       43
       44
       45
       46
       47
       48
       49
       50
       51
                                              w eeks

                                                                  Source: COALWorld.net
                                                                                                                                                                                           May.10
                                                                                                                                                                                           Apr.26
                                                                                                                                                                                                    Source: COALWorld.net
4. Seaborne thermal coal prices bottoming out, and coking coal




                                                                                                                                                                                           Apr.12
                                                                                                                                                                                           Mar.29
                                                                                                                                                                                           Mar.15
                                                                                                                                                                                           Mar.1
                                                                                                                                                                                           Feb.8
                                                                                                                                                                                           Jan.25
                                                                                                                                                                                           Jan.11
                                                                                                                                                                                           Dec.28
                                                                                                                                                                                           Dec.14
                                                                                                                                                                                           Nov.30
                                                                                                                                                                                           Nov.16
                                                                                                                                                                                           Nov.2
                                                                                                                                                                                           Oct.19
                                                                                                                                                                                           Sep.27
                                                                                                                                                                                           Sep.14
                                                                                                                                                                                           Aug.31
                                                                                                                                                                                           Aug.17
                                                                 Domestic steam coal prices FOB QHD




                                                                                                                                                                                           Aug.3
                                                                                                                                                                                           Jul.20
                                                                                                                                                                                           Jul.6
                                                                                                                                                                                           Jun.22
                                                                                                                                                                                           Jun.8
                                                                                                                                                                                           May.25
                                                                                                                                                                                           May.11
                                                                                                                                                                                           Apr.27
                                                                                                                                                                                           Apr.13
                                                                                                                                                                                           Mar.30
                                                                                                                                                                                           Mar.16
                                                                                                                                                                                           Mar.2
                                                                                                                                                                                           Feb.16
                                                                                                                                                                                           Feb.1
                                                                                                                                                                                           Jan.12
                                                                                                                                                                                           Dec.29
                                                                                                                                                                                           Dec.16
                                                                                                                                                                                           Dec.1
                                                                                                                                                                                           Nov.17
                                                                                                                                                                                           Nov.3
                                                                                                                                                                                           Oct.20
                                                                                                                                                                                           Oct.6
                                                                                                                                                                                           Sep.16
                                                                                                                                                                                           Sep.1
                                                                                                                                                                                           Aug.18
                                                                                                                                                                                           Aug.4
                                                                                                                                                                                           Jul.21
                                                                                                                                                                                           Jul.7
                                                                                                                                                                                           Jun.23
                                                                                                                                                                                           Jun.9
                                                                                                                                                                                           May.26
                                                                                                                                                                                           May.12
                                                                                                                                                                                           Apr.28
                                                                                                                                                                                           Apr.14
                                                                                                             FOB Price(5500 kcal/kg)

                                                                                                                                       FOB Price(5000 kcal/kg)


                                                                                                                                                                                           Mar.31
                                                                                                                                                                                           Mar.17
                                                                                                                                                                                           Mar.3
                                                                                                                                                                                           Feb.18
                                                                                                                                                                                           Jan.28
                                                                                                                                                                                           Jan.14
                                                                                                                                                                                           Jan.2
                                                                                                                                                                                           Dec.17
                                                                                                                                                                                           Dec.3
                                                                                                                                                                                           Nov.19
                                                                                                                                                                                           Nov.5
                                                                                                                                                                                           Oct.22
                                                                                                                                                                                           Oct.8
prices up 10% in 1Q


                                                                                                                                                                                           Sep.17
                                                                                                                                                                                           Sep.3
                                                                                                                                                                                           Aug.20
                                                                                                                                                                                           Aug.6
                                                                                                                                                                                           Jul.23
                                                                                                                                                                                           Jul.9
                                                                                                                                                                                           Jun.25
                                                                                                                                                                                           Jun.11
                                                                                                                                                                                           May.28
                                                                                                                                                                                           May.14
                                                                                                                                                                                           Apr.28
                                                                                                                                                                                           Apr.16
                                                                                                                                                                                           Apr.2
                                                                                                                                                                                           Mar.19
                                                                                                                                                                                           Mar.5
                                                                                                                                                                                           Feb.12
                                                                                                                                                                                           Jan.29
                                                                                                                                                                                           Jan.15
                                                                                                                                                                                           Jan.5




                                                                                                      1040
                                                                                                      1000
                                                                                                       960
                                                                                                       920
                                                                                                       880
                                                                                                                    840
                                                                                                                    800
                                                                                                                    760
                                                                                                                    720
                                                                                                                    680
                                                                                                                    640
                                                                                                                                                                             600
                                                                                                                                                                                   560
                                                                                                                                                                                   520
                                                                                                                                                                                   480
                                                                                                                                                                                   440
                                                                                                                                                                                   400
                                                                                                                                                                                   360
                                                                                                                                                                                         320
                                                                                                                                                                                         280
                                                                                                                                                                                         240
                                                                                                                                                                                         200
                                                                                                                                                                 yuan/tons
5. Hard coking coal resources in short supply



In spite of rapid steel production capacity expansion, China’s coking coal
production grew very slowly during the past years, and China has not
made much investments in new mines in recent years.
                              China’s Steel Production for 2004-2009
               700                                                                                        30%
                                          Crude steel                  Change %
               600                                                                            567.84
                                     24.6%                                                                25%
                                                                494.89           500.31
               500       23.2%
                                                                                                          20%
                                             422.85
million tons




                                                        18.5%
               400               353.45
                                                                         15.7%                            15%
               300
                     280.49                                                                       13.5%

                                                                                                          10%
               200

                                                                                                          5%
               100

                                                                                     1.1%
                0                                                                                         0%
                     2004         2005           2006           2007             2008          2009


                                                                                            Source: NBS
                            China's Hard Coking Coal Prodution for 2004-2008
                   12                                                                                                           14%
                                                                                                             10.3299
                                                                    9.6107                9.7967                                12%
                   10                            9.1246
                        8.8428                                                                                                  10%
100 million tons




                   8                                                                                                            8%
                                                                                                                                6%
                   6
                                                                                                                                4%
                   4                                                                                                            2%
                                 2.3566                   2.3441             2.4171                2.3419              2.3989
                                                                                                                                0%
                   2
                                                                                                                                -2%
                   0                                                                                                            -4%
                           2004                     2005               2006                  2007                  2008

                                      National             Shanxi       National YoY(%)            Shanxi YoY(%)




                                                                                                                   Source: NBS
Hard coking coal may account for approximately 33% of total coking coal
output, while the blending ratio of hard coking coal for coke production
ranges from 50% to 60% in China, leading to structural shortage of hard
coking coal. Normally, raw coking coal has to be washed, with general
recovery rate at 50% for hard coking coal, ad 70% for non-hard coking coal.
(II) Coal Market Outlook

 1. The ongoing coal mine safety inspection nationwide after the recent
    severe mine flooding will slow down reopening of consolidated mines in
    Shanxi and affect many other provinces; while Henan has launched coal
    mine consolidation campaign, these may constrain coal production
    growth in China.


    Coal production may increase by 250 million tons to 3.3 billion tons in
    2010, including 200 million tons contributed by Shanxi and Inner
    Mongolia.
2. Coal demand is expected to be strong. The current drought in the
southwestern China pushed up thermal coal demand 3% or so, if the
drought continues through this summer, it will push up thermal coal demand
at least 5%.


Coal consumption is expected to grow 7% or so in 2010, with power sector
up 6.3% YoY, steel sector 9.8%, building materials up 9.1%, chemicals up
2.7% (CNCA).


It is likely to see supply tightness in the peak season in some regions.
3. Thermal coal prices may move upward in the coming months and stay at
relatively high levels throughout this year, but the price rise might be
moderate, in view of the tightening measures taken by the government which
might slow down demand in the second half.


4. Coking coal prices dragged by stagnant steel market will remain stable and
hopefully rise moderately later this year, as the supply tightness will hardly
improve.
II. Coal Mine Consolidation and Transportation
    Bottleneck

  Small coal mines and transportation bottleneck are two most critical
   factors which may make domestic coal supply unstable and cause
   seasonal and regional supply tightness in China.
(I) Coal Mine Consolidation

China has closed down about 12,000 ones of 25,000 small mines since
2005, eliminating about 300 million tons/year in production capacity.
According to the target set by the government, 10,000 small mines will be
allowed to operate by 2010.
     Breakdown of coal production for 2009 by ownership of coal mines




       38.23%                                         49.79%




                    11.98%
                                                      Key state-owned coal mines
                                                      Local state-owned coal mines
source: SAWS                                          Small coal mines
     Breakdown of coal production by ownership of coal mines for Q1 2010


        25.39%




                                                                             58.37%


                                                              Key state-owned coal mines
           16.24%
                                                              Local state-owned coal mines

                                                              small coal mines
source: SAWS
       Closure of small mines in Shanxi for 2005-2009
4000                                                                               0%
       3365                                    -2.8%
                                                                 -7.5%             -10%
                       2891 -14.1%     2810
3000
                                                          2598                     -20%

              -26.8%
                                                                                   -30%
2000
                                                                                   -40%

                                                                         1053
                                                                                   -50%
1000
                                                                            -59.5% -60%

  0                                                                                -70%
       2005            2006             2007              2008           2009
                           No of small mines           Change YoY
Implications:


production of small coal mines is easily affected by the government's
safety rectification and mine consolidation campaign, and its official
production statistics tends to be underestimated, making domestic coal
supply unstable. With the remarkable progress made in the consolidation,
domestic coal supply may become more stable.
(II) Transportation Bottleneck

Shanxi, Inner Mongolia and Sha’anxi, located in northwestern China, are
China’s top three coal producers and suppliers, and the top two provinces
Shanxi and Inner Mongolia may make up about 70% of China’s total cross-
province coal sales. The three provinces rely heavily on three coal-carriage
railway channels to ship coal to eastern, southern and central parts of
China.
            Transportation capacity of Three Coal –Carriage Channels

          Coal-carriage channels          2007               2010
             Northern channel               481               642

             Central channel                71                110
            Southern channel                159               205
                   Total                    711               957
                                                         Source: NDRC



Newly-increased railway investments as part of the economic stimulus package
may gradually loosen railway transportation bottlenecks in the coming 3-5 years.
So-called “Second Daqin Railway” under construction
III. Driving Forces of China’s Shift to a Net Coal Importer

  China has shifted away from a net coal exporter to a net coal importer in
  the past years. Price gap is always the biggest driving force of China’s coal
  import. However, it is worth mentioning that the fundamental driving forces
  behind this shift may include liberalization of the coal sector, especially
  market-oriented coal pricing, coal mine consolidation, transportation
  bottlenecks, as well as China’s shift to encourage coal import.
                                 China's Coal Exp&Imp for 2004-2009
                 140
                       e xport
                 120   import                     Source: China Customs            125.8


                 100
                          86.6
  million tons




                 80                        71.7
                                                     63.3
                 60                                          53.2
                                                                      45.4

                 40                                           51
                                                                           40.4    22.4
                                                    37.8
                 20                   25.6
                          18.4

                  0
                       2004         2005          2006      2007          2008    2009




In 2005, closure of small mines, liberalization of thermal coal market by means of
government guided contract price

In 2006, elimination of coal export tax rebates
In 2007, 5% coal export tax, elimination of coal import tax
In 2008, no government guided contract price
In 2009, failure in coal contract settlement
China’s coal imports will continue to stay at high levels this year, hopefully
higher imports in 1st half but lower imports in 2nd half due to higher prices in
the overseas market, domestic production improvement and smooth coal
contract settlement between coal producers and power companies. we
expect total imports to be less than 100 million tons in 2010.
               China's coal imports for 2008-2010 (Unit: 10,000 tons)
1800
1600      1607.8                                           1607.4
                             1522                                                                                   1638.5
1400                                                                1388.7
                   1310.7                                                               1254.6             1265.3
1200
                                  916.1                                       1177.4              1113.8
1000
                                                  943                                                          2008
800                                                                                                            2009
                 487.9
600                              572.1                                                                         2010
       423.6                                      416.2            338.8     378.7     370.4
400                                                                                               348.6 217     267.4
                            420.3
200     298.9       282                   340.2
                                                           278.4                            source: China Customs
  0
       Jan.     Feb.      Mar.      Apr.      May.      Jun.   Jul.        Aug.      Sep.      Oct.   Nov.     Dec.

                                                                                            Source: China Customs
               China's coking coal imports for 2008-2010 (Unit: 10,000 tons)
600
                                                               490.5                                     2008
500                                                  463.3                                               2009
             475.8
                                                                                     428.3               2010
400
                                                                           384.6                             349.7
                              337.9
300                                    283.1                                                         286.2
                     274.3
                                           197.9
                                                                                             221.2
200
                              190.9
                                                                          105.8
100     60.9                                 61.6      58.3                                        55.5 70.7
                  132.3                                          51.3                      33.7
                 23.2        37.3
      21.3                                                                         74.2 source: China Customs
 0                                    53.1

       Jan.      Feb.     Mar.      Apr.     May.   Jun.      Jul.      Aug.      Sep.    Oct.   Nov.    Dec.

                                                                                         Source: China Customs
Thank you !
   coalworld@vip.163.com

				
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