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China - Coal

A dependence on coal for 80 percent of electricity generation and excessive reliance on heavy industry for industrial output have created extraordinary air and water pollution problems that are expected to worsen considerably.

China is the largest producer and consumer of coal in the world and accounts for almost half of the world's coal consumption. China's vast coal resources enable the fuel to remain the mainstay of the country's energy sector and allow it to be a key driver of massive economic growth over the past decade. China has been the world's leading coal producer and consumer in recent years and accounted for close to half of the global coal consumption, an important factor in world energy-related CO2 emissions. According to the World Energy Council, China held an estimated 126 billion short tons of recoverable coal reserves in 2011, the third-largest in the world behind the United States and Russia, and equivalent to about 13% of the world's total coal reserves.

Coal production rose 4% from 3.8 billion short tons in 2011 to nearly 4 billion short tons in 2012, the slowest growth in over a decade. Although there are 28 provinces in China that produce coal, Shanxi, Inner Mongolia, Shaanxi, and Xinjiang contain most of China's coal resources and virtually all of the large state-owned mines. China currently has about 12,000 coal mines producing primarily bituminous coal and a fair amount of anthracite and lignite. These elements make up steam coal, used mainly to generate electricity and produce heat in the industrial sector, and coking coal, also known as metallurgical coal, used primarily to smelt iron ore and produce steel. Much of China's steam coal resources are located in the north central and northwestern regions, whereas coking coal reserves are found mostly in central and coastal parts of China.

Coal comprised 69% of China's total energy consumption in 2011. In 2012, China consumed an estimated 4 billion short tons of coal, representing close to half of the world total. Coal consumption in 2012 was more than two times higher than it was in 2000, reversing the relatively flat growth seen from 1996 to 2000. About half of China's coal is used for power generation. The industrial sector including steel, pig iron, cement, and coke currently, accounts for 45% of coal use. Coal consumption generally tracks economic growth, electricity demand, and industrial sector output. EIA projects that as industrial growth moderates in the long run and the economy becomes less energy-intensive, electricity generation will increase its share of coal consumption to 57% by 2040 from 50% in 2010.

Prior to 2009, China's domestic coal production generally met all of its consumption requirements. However, in recent years, the country has ramped up its import volumes because of higher demand. Historically, a net coal exporter, China became a net coal importer in 2009 for the first time in over two decades. Total imports rose to 323 million short tons in 2012, about 30% higher than 2011 levels, according to FGE. Indonesia and Australia are the largest coal exporters to China, supplying more than 60% of China's imports in 2012.

The rise in imports is primarily driven by steady demand growth and the high coal transportation costs resulting from bottlenecks in China's railway capacity, which makes imported coal economically attractive, especially in Southeast China. As the bulk of the coal production moved westwards, an increasing amount of coal needs to be transported over long distances from the supply regions in the west and the north to the demand centers along the coast and the southern and eastern provinces via rail and truck. In recent years, the country has struggled with transportation bottlenecks in bringing all the coal to market, creating regional imbalances. Also, international coal prices, which are currently low, have been slightly below China's domestic prices since 2011, making imports more commercially competitive with China's own coal supply, particularly along the coastal regions.

As coal demand growth eased in 2012, the country witnessed an oversupply of coal and rising inventories. Despite this surplus, some of China's major coal producers, particularly in key coal-producing provinces in northern and northwestern China that have larger and lower-cost mines, continued to increase domestic production, albeit at a more moderate pace. Producers in these regions are able to reduce their unit costs through higher output and economies of scale. Also, producers are taking advantage of the government's financial incentives and sector reforms to curtail taxes and provincial duties imposed on mines. However, some mines in Inner Mongolia that produce lower-calorific coal and transport most of their coal outside of the region have suspended their output in response to weaker demand and revenue losses. Mines able to keep their costs low in the current low coal-price environment will be able to maintain higher production levels. China's current Five-Year Plan addresses the regional imbalance of coal supply and demand through investments in greater railway capacity and higher electricity transmission capacity to enable electricity generated from coal to travel long distances to demand centers.

China's coal industry has traditionally been fragmented among large state-owned coal mines, local state-owned coal mines, and thousands of town and village coal mines. The top-ten coal companies produced over a third of the domestic coal in 2011, according to FGE. Shenhua Group, the world's largest coal company, holds over 10% of the domestic market in China.

China has about 10,000 small local coal mines where insufficient investment, outdated equipment, and poor safety practices prevent greater utilization of coal resources. Although the smaller coal mines currently hold a sizeable portion of the market, they are inefficient and are ineffective in responding to market demand. The goal of industry consolidation is to attract greater investment in new coal technologies and improve the safety and environmental record of coal mines. The government's current 12th Five-Year Plan calls for a production ceiling of 4.4 billion short tons and a capacity ceiling of 4.6 billion short tons by the end of 2015 in an attempt to control the production growth. The Five-Year Plan also calls for streamlining the industry by forming 10 large coal companies that will account for about 60% of the country's total coal production and capping the number of coal mines at 4,000 through mergers and acquisitions.

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Page last modified: 03-06-2014 16:07:21 ZULU