Scratchpad Analysis of Coal Issue in China

Tuesday, August 5, 2008 14:00
Posted in category Uncategorized

Last night I met up with a friend and we were running through the recent coverage of China’s coal problem, and while hashing out some of the seemingly conflicting issues (pricing vs. exports vs. rail capacity), I/ we ended up running through a scratch pad analysis of a few different scenarios.

using the image above as the “scratchpad”, we worked through a few items:

1) For the last 18 month, there has been a lot of coverage on China’s rail network not having the capacity to move coal (black circle) to Guangdong (red dotted line).  I have covered this regularly, and it is what most point to as one of the core issues of ongoing power shortages.  there have been efforts to offset by importing coal into the province from Australia and other countries as it is supply chain wise the only way to ensure coal deliveries.

2) Recently there  was a story on BBC that a new problem has formed, that rather than ensure domestic deliveries, coal is being exported for higher profit.  Something that occurred earlier this year with petro, this is purely a problem of the central government allowing the domestic to international gap to grow too wide through their efforts to curb inflation and cap energy prices.

Add these two stories together and you have what would seem to be a perfect storm that would only ensure further energy shortages.

However, when we began deconstructing the second story a bit further, we realized that it is entirely possible that China could export coal safely.  While it makes for a good headline, the recent exports are not actually the issue at all, and that recent visits to coal mines may be little more than show.

Essentially, what we boiled down to was that if it is true (and we believes it was) that rail capacity was the core issue for southern China, that the exports of coal were actually not impacting these areas as no more coal could be sent.  That more than likely, and it would take a lot more analysis to be 100% confident on this, the coal being exported is being sent from the coal region to the Binhai/ Shandong area for export on rail cars that have excess capacity.

One area that we did think could be impacted through this was the southwest region.  If you will recall, during the snowstorm earlier this year knocked out a lot of generation capacity for the 17 provinces affected, and the earthquake earlier this year also knocked  out capacity, so this is an area that may actually be seeing coal exports directly impacting their stockpiles.  this is an idea that we are confident with as it was after these events that China looked at opening the smaller mines that had been closed as part of earlier crackdowns, so there was a supply problem at that point that needed to be solved.

As a wrap up, what this map allowed us to see was that (1) there is excess rail capacity for Binhai and southwest regions, but reaching Guangdong is still a problem (2) the pricing cap that the central party has put in place has created a gap that can be arbitraged, and could create real supply issues if mines close rather than lose money (3) exports through the north will likely have little impact on stock in the South (unless the firms are exporting in north, then reimporting in South – which could actually alleviate some supply chain problems)

Certainly an issue that investors and manufacturers should stay on top of as coal prices are set to jump again after the Olympics are over, and that is sure to impact the system on the demand side.

If you have any comments on the above, feel free to add your thoughts in the comments section.

See my previous posts on energy and coal here

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4 Responses to “Scratchpad Analysis of Coal Issue in China”

  1. Alex at InEmerging says:

    August 5th, 2008 at 6:16 pm

    It’s pretty common for coal to reach the South first via train to Tianjin (near Tianjin) then via boat to the South.

    I do not believe the current coal shortage is because of excessive exports but should (now forbidden) exports occur I suppose that’s the way they’d go.

  2. Duncan says:

    August 5th, 2008 at 8:26 pm

    The huge power shortage in Shandong (and much of the north) suggests that if there’s problems on the tracks they’re abundant in the north as well as the south.

    According to customs coal exports were up 10.2% in volume terms in H1 (25.5m tones vs 23.1m) – only March saw a big drop off vs last year. Coke and semi-coke down to 7.4m tonnes in H1 vs 8m last year. Sadly no breakdown on types of coal within this, and I’m not entirely sure how it can mesh with the supposed ban on exports, but that’s what the official figures say anyway… In any case, exports are only a very small fraction of total coal production.

  3. Eric says:

    August 5th, 2008 at 8:57 pm

    I believe that while transport is certainly a major issue, there are other factors at play here – perhaps most indicative is an NDRC reg that came out in late July re-stating a freezing of coal contract prices at June 19 levels (there had been a previous announcement about this), and declaring punishments for coal companies that did not fulfill their coal contracts. They skip out on contracts in order to sell on the spot market, whose prices have spiked since the beginning of the year; however powerplants, which must sell to grid at basically fixed prices, may struggle with purchase of large quantities of spot coal, so climbing spot prices may impact coal fired plant power production if unfulfilled (or inadequate) contracts are widespread. The fact that the govt is restating price freezes tells me this is a major problem. Likewise safety concerns of local officials during Olympics would dampen enthusiasm for re-opening smaller mines to meet growing demand. In other words, a skewed incentive structure for meeting coal production and power production demand, as well as practical difficulties of supply/transport, are exacerbating the normal challenges of keeping pace with development (i.e. GDP/export growth) and toasty summer-driven demand growth.

  4. Rich says:

    August 6th, 2008 at 10:30 am

    @ Alex – thanks for the additional comments. I figured there was some shipping occurring, but we were in a bar/ restaurant without wifi and were just going after the exports are evil theory.

    @ Duncan – Thanks. I would be interested in finding out more on the actual products being exported and how they fit into the China picture. Perhaps mines are selling high end thermal coal overseas as local buyers may be unwilling to pay the price… or they are unwilling to offer it locally given the new price caps.

    @ Eric – I follow you , and I think that we are at the point where we started with one problem, then added another, and have a hybrid whose solution will come in the form of either a price hike that curbs demand and relieves supply pressure… or we make it through the heat and the Olympics and a/c units are turned off, thus releasing some pressure. Adding supply will help to relieve prices only so far as they can more the goods, and hopefully at about the time the supply comes online it will be matched with a drop in demand… that will make the price gap close, and reduce the supply chain impact as well.

    thanks for the comments everyone.

    R