China Coal Monthly

December, 2008

China Coal Monthly January, 2009

Summary Key Points z z

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z

z

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Financial crisis’ impact on Chinese coal market increasingly evident Chinese coal demand in January estimated to drop to 213.86 million tons, down by 6 percent from a year ago Chinese coal production in January slightly down from last month and estimated at 159.16 million tons, down by 10 percent from a year ago Production drop of steel unlikely to go away hence January’s coking coal demand continuing to fall to an estimated 20.95 million tons, down by 12 percent from a year ago December’s coal consumption down to 251.87 million tons, slightly up from August though down 1.5 percent from a year ago Some coal companies restricting production to support prices; December output at 310.66 million tons, slightly up from November but down by 4 percent from last year Though slight rebound in steel market, December’s coking coal demand at 21.95 million tons down by 13 percent from last year December’s coking coal output at 22.47 million tons, down by 20 percent from last year

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Entering 2009, the global economy has sunken into total recession, and Chinese economy continues to be on a downward path. Difficulties in export can hardly be mitigated while manufacturing continues to shrink. Major coal consuming industries including electric power, metallurgical and chemicals remain sluggish with output likely to continue having negative growth. Though January is the peak consumption season for heating, industrial production is rather weak. The impact of the long holiday of New Year’s Day and Chinese New Year in January and the already weak industrials is adding salt to the wound. Coal demand will be extremely weak with an expected growth rate of negative number in January. Gloomy demand and overstocked inventory are causing pressure on coal production. Resources tax which was raised in 2009 has further increased the cost of coal mining. Slowdown in coal production is expected to be significant in January starting from large state-owned coal mines especially major coal producing provinces in western China that supply coal to the coastal regions. Production drop at local or rural coal mines will be mainly due to production halt during Chinese New Year’s long holiday. Transportation of coal in China will fall considerably as well. Coal inventory has begun to fall. Coal prices are to remain weak. Due to slight rebound in steel market, coking coal demand has slightly recovered though demand and prices have generally remained low. Strong cold air drove up coal demand in most parts of China during December. Coal prices in a number of regions have rebounded while port inventory and market inventory both fell slightly. But the seasonal factor could hardly serve as remedy to large drop in economic growth, especially the low or even negative growth in electric power industry and other major coal-consuming industries. Coal demand as a whole remains weak while coal production growth has continued to drop. A lower coal export quota has resulted in export maintaining at a rather low level. Large drop in international coal prices in addition to the falling ocean freight cost have somewhat encouraged Chinese coal companies to import. Due to the lack of support, Chinese coal prices largely fell in December. The extent of drop in prices revealed the trend of the amplification of the impact from interior regions to coastal regions and that the financial crisis’ effect is spreading from coastal regions to interior regions. Because of a weak steel industry, coking coal price has been falling more rapidly than steam coal and electricity coal. Crude steel price throughout China has been slightly recovering, somewhat driving up coking coal prices. 1

China Coal Monthly

December, 2008

Coal Demand Demand Outlook: Long Holiday Further Suppressing Demand

09-1

11

9

7

5

3

08-1

11

9

7

5

3

The world welcomed New Year amid turbulence with all major economic entities in recession and the crisis has been spreading worldwide. 2009 will be a year that the worldwide recession worsens. The gloomy demand situation has severely hurt Chinese export industries. Chinese export is much likely to have a negative growth while manufacturing and raw material processing industries will continue to shrink. A weak real estate market can hardly be avoided. In addition to its 4 trillion Yuan bail-out plan, Chinese government is expected to adopt further measures in stimulating demand and supporting the economy though the result will unlikely show within a short period of time. Overall coal consumption in January will be industrial value-added Monthly Economic lower than in December. Major factors in affecting export Index in China January’s Chinese coal demand will be the huge fixed asset investment 50% fallback in industrial production. In most cases, Januaray is still considered a peak consumption 40% period for heating, but also a slack season for 30% industrail activities while coal is the major fuel for 20% both of them. On another front, this year’s Chinese New Year holiday is in Janaury which 10% furthur worsens the already slack industrial 0% production. Energy intensive industries such as steel, automobiles, cement and glass will remain in -10% the trough which will result in furthur drop in electricity demand and hence coal demand. Growth of Chinese electricity consumption in January is expected to be extremely low or even negative. Coal demand wil also sink into negative growth. January’s Chinese coal demand is estimated to be 220.81 milliont ons, down by 13 percent from December, 2008 and down by 3 percent from a year ago.

Demand in December: Continuing to be Sluggish China Monthly Coal Consumption Two strong cold air currents swept through million tons most parts in China, slightly driving up heating volume 15% coal demand, especially the sudden rise in demand 250 growth of winter coal in southeastern provinces which 200 10% caused inventories at major ports to drop in 150 December. On the other hand, export in 5% December can hardly avoid downturn. Steel and 100 0% coking coal go on their previous gloomy trend to 50 have production growth remaining negative. 0 -5% Automobile market’s quick descend into recession Apr Jul Oct Jan-08 Apr Jul Oct Jan-09 has stroke hard on domestic auto industry. Chinese domestic consumption has shown to be significantly affected and its growth will slow. Shrinkage in industrial activities directly caused total power generation in China to slow or even reached negative growth which further affected coal consumption. Though power industry and industrial inventory has not decreased, recession in coal demand can hardly be turned around. December’s Chinese coal consumption is expected to be seasonally up to 254.09 million tons, up by 4 percent from November but up by a mere 0.1 percent from the same period last year. Monthly coal consumption in China （million ton）

Total -for power

2008 JAN

2008 FEB

2008 MAR

2008 APR

2008 MAY

2008 JUN

2008 JUL

2008 AUG

2008 SEP

2008 OCT

2008 NOV

2008 DEC

2009 JAN

230

201

239

223

226

226

230

234

215

214

232

254

221

106.9

100.0

118.4

122.2

128.4

125.9

104.5

136.3

95.3

94.4

95.4

98.8

87.5

* Figures for September 2008 are 3E estimates.

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China Coal Monthly

December, 2008

Coal Supply Supply Outlook: Production to Slowdown Further The weakening Chinese economy is China Monthly Coal Production suppressing coal demand. Plus the previously stocked inventory, coal production is faced with million tons volume increasing pressure. Entering 2009, another factor 250 15% growth that’s affecting coal production is the resources tax 240 which was raised by 4 percent ad valorem. Mining 230 10% cost of coal is expected to increase by 4 to 6 Yuan 220 per ton. At the same time, Shanxi, Hebei, Shaanxi 210 5% and other major coal producing provinces have 200 begun restricting coal production one after 190 another. Seasonally speaking, January’s coal 180 0% production will be considerably lower than Apr Jul Oct Jan-08 Apr Jul Oct Jan-09 December’s. Following start of production restrictions at large state-owned mines in January, coal production in China will slow down along wtih economic downturn and demand weakening, while production cut at local and rural coal mines is due to the long holiday during Chinese New Year. Regionally speaking, production drop in major coal producing provinces such as Shanxi, Shaanxi and Hebei will have even greater extent. In Hunan, Hubei, Sichuan, Guizhou and other provinces where small local mines are concentrated in, the long holiday will be the major factor in affecting output. January’s Chinese coal production is estimated at 218.79 million tons, up by less than 1 percent from last year but largely up by 14 percent from December. Supply in December: Oversupplied Steam coal was at its peak consumption in China Monthly Coal Import-Export December as winter heating demand drove up coal production and curbed the rising coal inventory. 1,000 tons export Generally speaking, large state-owned coal mines import 8,000 had no choice but to cut production due to demand slump of power, steel and other industries. 6,000 Small local coal mines however saw production increases compared to the same period of last year. 4,000 Less export quota made it possible for Chinese 2,000 coal export to stay at a low level for now while retreat of international coal prices and fallback in 0 ocean freight cost to some extent encouraged May Aug Nov Feb May Aug Nov demand of coal import. It’s estimated that China’s coal import and export were relatively balanced during December. Chinese coal production in December is estimated at 253.59 million tons, slightly up from November’s data and the growth from last year further down to only 3 percent. Monthly coal supply in China

（million ton）

2008 JAN

2008 FEB

2008 MAR

2008 APR

2008 MAY

2008 JUN

2008 JUL

2008 AUG

2008 SEP

2008 OCT

2008 NOV

2008 DEC

2009 JAN

217

210

231

227

225

229

227

235

227

233

250

254

219

State central

100

111

114

120

107

113

116

120

123

113

123

119

95

State local

24.7

20.7

24.9

31.4

37.7

27.3

29.2

28.7

28.7

47.3

14.4

31.2

25.7

Township

92.4

78.3

91.9

75.5

80.4

88.7

82.5

86.0

76.7

72.7

112.5

103.7

98.5

Import

4.29

2.82

4.26

3.43

4.32

2.99

3.58

4.07

3.70

3.96

2.55

2.79

2.41

Export

5.75

3.00

1.44

4.39

3.91

6.99

4.79

3.37

2.08

2.56

2.69

3.19

2.17

Production

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China Coal Monthly

December, 2008

Coal Transportation and Inventory Transportation: Total Loads Largely Down Drop in Chinese coal demand and production as well as the weak coal export has resulted in further shrinkage in total freight loadings and transportation volume. Chinese government adopted certain measures to divert and mitigate the rising coal inventories at ports which further cut daily loadings and shipments on major coal-moving railroad routes. Even during coal’s peak consumption period in January, coal transportation still has had quite a drop compared to December. 2008 JAN

2008 FEB

2008 MAR

2008 APR

2008 MAY

2008 JUN

2008 JUL

2008 AUG

2008 SEP

2008 OCT

2008 NOV

2008 DEC

2009 JAN

shipping

110

112

113

108

112

110

114

123

117

120

102

102

101

loading

53.8

58.5

54.9

54.3

54.4

55.0

55.2

59.3

58.7

58.6

51.3

51.1

50.9

* unit of shipping is million ton, unit of loading is 1000 wagons per day

Shanxi Coal Trans-regional Transmission Trans (Nov. 2008，1000 ton) Heilongjiang

Jilin Xinjiang

Liaoning 687.8 Inner Mongolia

Gansu

178.3

Ningxia

Qinghai

Beijing 710.5

Tianjin 1277.7: Shanxi 1795.6 Hebei 4677.9 Shandong 5581.8 Henan 1202.6

Shaanxi

Export 1729.9

Jiangsu 2293.7

Tibet Sichuan

Hubei 944.5

Shanghai 768.6

Chongqing

Jiangxi 230.2Zhejiang 2422.3 Hunan 548.7 Fujiang 220.3

Guizhou Yunnan

Guangxi

Guangdong 2282.2

Taiwan

Hainan 112.4

Coal Inventory ： Starting to Fall Back

As Chinese coal production and coal import began to face restrictions, coal inventory which has been rising since mid 2008 is starting to fall back. Especially in December when Datong-Qinhuangdao route experienced a 50 percent drop in coal transportation. As China’s transfer and forwarding port of coal, Qinhuangdao has witnessed significant drop in its excessive inventory.

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million tons

Coal Inventories at Qinhuangdao Port

9 8 7 6 5 4 Jan-08

Mar-08

Jun-08

Sep-08

Dec-08

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China Coal Monthly

December, 2008

Chinese Domestic Coal Prices

January Price Outlook: Continuing its Weak Performance

Entering January, slowdown in industrial growth and the continued retreat of power demand as well as the long holiday will drive coal into a gloomier market with lack of supporting momentum. In immediate term, price fluctuation will take place as temperature changes. But generally speaking, going downward has been the dominant trend of coal prices throughout most Chinese regions and the extent of further drops will likely be smaller. Coal prices in most regions are expected to have little fluctuation except for a few coal provinces where prices continue to slump.

December Price: Downward Movement Evident

In December, the ever weakening demand especially industrial slowdown and power demand drop resulted in coal prices in most parts of China going lower. Even though the cold current drove up heating coal demand for a short period of time, the market as a whole has been weak without the momentums that support coal prices rebounding. Coal prices in December mostly fell in China. In terms of regions, coastal provinces experienced larger drop in coal prices compared to interior provinces in December. Price dropped more than 100 Yuan per ton in most coal provinces while price drop in interior provinces was no more than 100 Yuan. This also confirmed the financial crisis’ propagation from coastal regions to interior regions. The timing and the extent of the impact felt by interior provinces all lag behind coastal provinces. Northeastern China felt relatively less impact hence coal prices there were rather stable. Major coal producing provinces in the west such as Xinjiang and Shaanxi that supply coal to the coastal regions also had large price drops. In terms of varieties, descend of coking coal price was much more rapid than steam coal and electricity coal because of the weak steel industry. The trend is expected not to be turned around in the immediate term.

China Coal Product Price Map

Heilongjiang Hegang Gas coal 5000 720

(Wholesale December of 2008)

Hebei Handan Coking coal 1250 Xinjiang Hami Steam coal 5500 174

Beijing Beijing Electricity coal 5800 650

Gansu Lanzhou Bituminous 6500 705

Inner Mongolia Huolinguole Brown coal 3500 179

Ningxia Lingwu Bituminous 5500 650

Shaanxi Yulin Steam coal 6000 530

Sichuan Chengdu gas coal 5000 470

Jiangsu Nanjing Bituminous 6000 980

Shandong Yanzhou Steam coal 6000 850

Shanghai Shanghai Coking coal 1500

Henan Yongcheng Anthracite 5500 536

Anhui Suzhou Electricity coal 4500 610

Guizhou Anshun Anthracite 5000 355

Province City Type of coal Kilocalorie

Liaoning Fuxin Bituminous 5500 430

Hunan Zhuzhou Anthracite 5000 540

Zhejiang Ningbo Steam coal 6500 1262

Jiangxi Xinyu Anthracite 6000 956

Yuan/ton Yunnan Zhaotong Anthracite 7000 910

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Guangxi Guigang Anthracite 6500 1070

Guangdong Guangdong bituminous 5600 710

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China Coal Monthly

December, 2008

Coke Market

Demand：Mild Recovery Unlikely to Sustain Due to positive expectation on Chinese government’s economic stimulus package, steel markets throughout China mildly recovered in December and the stocked up inventory somewhat dropped. Steel plants that either halted or cut production resumed production, driving up coking coal demand to some degree. But the market’s expectation for future obviously exceeded demand rebound. Steel and coking coal production were far from normal production. Therefore the recovery is unlikely to sustain, and demand for coking coal isn’t going much higher in the immediate term. Considering factors such as January’s long holiday limiting industrial activities, coking coal industry will be hit even harder. December’s Chinese coking coal demand is estimated at 22.47 million tons, down by 20 percent from a year ago. January’s Chinese coking coal demand is estimated to further drop to 21.03 million tons, down by 12 percent from a year ago.

Supply：Further Decline in Production and Export Steel market’s short-lived recovery China Monthly Coke Consumption hardly brought any real dynamics to coking industry. In fact, major coking companies 1,000 tons volume growth will continue restricting production to 30 30% support prices and will strive to raise ex-plant coking coal price. In immediate 15% 20 term, Chinese coking coal production will be hovering at a low level without 0% considerable recovery. December’s Chinese 10 coking coal production is estimated at 22.97 million tons, down by 13 percent from a -15% 0 year ago. January’s Chinese coking coal Apr Jul Oct Jan-08 Apr Jul Oct Jan-09 production is estimated to slide further down to 21.92 million tons, down by 12 percent from a year ago. Affected by the export quota of coking coal, coking coal exports in December remained relatively low. January’s coking coal production is expected to slightly increase along with new export quotas issued in January.

Inventory：Inventory Dropping Coking coal inventories in most parts of China dropped in December with a few regions even experiencing tight supply. Overall, Chinese coking coal inventory will continue to maintain at a relatively low level. Entering January, the long holiday will further depress demand hence slight increase in inventory is possible.

Price：Slight Increase Crude steel price throughout China mildly recovered in December, therefore also slightly driving up coking coal price. But the rise in price was not without fluctuations. In December, coking coal price in China’s major steel producing provinces such as Hebei, Shandong, Beijing and Shanghai all increased by near 200 Yuan per ton. With factors that would sustain such increase missing, price might even fall again during January’s long holiday.

Monthly coke consumption in China

（million ton）

2008 JAN

2008 FEB

2008 MAR

2008 APR

2008 MAY

2008 JUN

2008 JUL

2008 AUG

2008 SEP

2008 OCT

2008 NOV

2008 DEC

2009 JAN

output

27

26

29

30

30

31

30

30

26

25

22

22

21

export

1.0

0.7

1.2

1.3

1.7

1.5

0.8

1.4

1.4

0.5

0.3

0.3

0.3

Con.

25

27

28

27

28

29

28

26

24

23

22

23

22

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China Coal Monthly

December, 2008

Industry Focus

“Chinese Coal Production-Transportation-Demand Coordination Conference” Launched

The 2009 Chinese Coal Production-Transportation-Demand Coordination Conference was launched in Fuzhou on December 21. Participants of the conference were China’s major companies involved in the coal trade including supply, transportation and consumption. China Guodian Corporation, Taiyuan Coal Exchange, State Grid Energy, Datang Corporation, Huaneng and Jiangsu Fuel Company were some of the large companies that attended the conference. Attendees invited by China Coal Transportation and Marketing Association accounted for a few hundred and some provinces and companies attended on their own accord. During the 7-day conference, coal companies and power companies were not able to sign a contract on electricity coal price in 2009. The conference ended with the five largest power companies signing no contract at all except a few contracts finalized between power companies and Shenhua Group.

NDRC Calling Off Price Ceiling of Coal

Per Price Law of People’s Republic of China, the Chinese National Development and Reform Commission called off its provisional price intervention measures on electricity coal, effective January 1, 2009. The removal of price ceiling of coal which was carried out for near half a year represents the dynamic change in coal market’s supply and demand relationship

Resources Tax Reform Taking Effect

With resources tax soon to take effect, coal industry is facing another wave of impact by VAT reform. From quantity-based to ad valorem, coal companies pay a resources tax of up to 10 percent. With coal producers no longer having ability of transferring cost increases to downstream, publicly listed coal companies are estimated to see their profit drop by 20 percent to 36 percent in 2009.

Port Qinhuangdao: Inventory Nose-Diving

Around November 15, the Chinese Ministry of Railway notified its Taiyuan Railway Bureau and Hohhot Railway Bureau requesting that Qinhuangdao’s inbound coal shipment would need to be confirmed by its outbound shipment in terms of quantity, and Qinhuangdao’s daily car loadings for Datong-Qinhuangdao route would be based on stocking capacity in Qinhuangdao. Inbound and outbound shipments both fell sharply by near 50 percent since then. This new policy has resulted in Qinhuangdao’s inventory dropping by a large margin of more than 2 million tons to below the warning level.

Shandong Province’s Coal Reserve Minable for Only 20 Years

Currently, retained proven reserve of coal in Shandong Province is only 31.1 billion tons of which 8.1 billion tons are recoverable reserves. Furthermore, 95 percent of the total proven reserves are put to use on construction, leaving only 4 billion tons in economically recoverable reserves. At the current production capacity and recovery rate, it can only sustain for 20 years.

Chifeng-Daban-Baiyinhua Railway Route Operational in 2009

With the last steel rail laid at Baiyinhua Station of China Power Investment Corporation’s Chifeng-Daban-Baiyinhua railway route on December 17, 2008, the entire route became operational as the fourth route of transporting coal from northern China to southern China. Chifeng-DabanBaiyinhua railway route will launch service in 2009, mainly transporting coal from Baiyinhua coal mine.

Shenhua Junggar Energy: Haerwusu Open-cast Coal Mine Operational

China’s largest open-cast coal mine – Shenhua Junggar Energy Company’s Haerwusu open-cast coal mine was put into operation on December 18. The mine is located in central Junggar coalfield and has an area of 67.17 square kilometers. Its recoverable reserve is 1.73 billion tons of high quality coal of mellow lime, low sulfur, ultra low phosphorus, high heat value and high flame. It’s designed to produce 20 million tons of coal a year for 79 years.

2009’s First Batch of Coking Coal Export Quota Released

Chinese Ministry of Commerce’s Department of Foreign Trade officially released 2009’s First Batch of Coking Coal Export Quota for General Trading. A total of 5.78 million tons was released by the first batch of coking coal quota towards 37 different companies. This batch of quota was 3.84 million tons or 39.9 percent less than last year’s first batch.

Lu’an Group Successfully Making Coal-derived Synthetic Oil

On December 12, Lu’an Group of Shanxi Province successfully produced its first barrel of coal-derived synthetic oil at China’s first independently developed Lu’an 160,000 ton coal-derived synthetic oil demonstration project on Tunliu Coal-Oil Cycle Economic Campus. 3E Information Development & Consultants

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China Coal Monthly

December, 2008

Appendix: Average metallurgical coal prices in major steel-producing regions of China in December 2008

Region

Type of coal

Jinan, Shandong Zhangjiagang, Jiangsu Tianjin Tangshan, Hebei

Anshan, Liaoning Shaoguan, Guangdong Beijing

Kunming, Yunnan Liuzhou, Guangxi

Supplier

Quality *

Coking Electricity Electricity Electricity Coking Electricity

>85 7000 6500 7000 >95 6000

Coking Coking Electricity Electricity Coking Coking Electricity 1/3Coking Coking

>85 >90 7000 6000 >90 >80 6000 >75 >75

Yuan per ton

Shanxi Shanxi Henan

1500 1000 950 1050 1250 800

Shanxi、Beijing Hebei Inner Mongolia, Shanxi Shanxi, Heilongjiang Shanxi, Hebei Hunan Shanxi

1350 1300 / 1000 1390 1330 760 880 950

Yunnan Yunnan, Guizhou Panxian

Average prices of coal for power generation in December 2008

Power plant

Type of coal

Huaneng at Nantong Huaneng at Taicang Xia’gang Yangzhou No.2 Shidongkou No.1 Tianshenggang

Datong Datong Inner Mongolia Inner Mongolia Lean coal Lean coal

Quality *

Yuan per ton

5500 5000 5500 5000 5500 5000

560 465 565 465 630 500

Coal output of the top 10 provinces (November, 2008)

Province Shanxi Inner Mongolia Hebei Heilongjiang Liaoning Anhui Shandong Henan Guizhou Shaanxi

1,000 tons 45,253 35,236 7,113 9,942 4,260 9,485 8,192 16,856 11,188 7,420

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* Tenacity for coking coal; and Kilocalorie heat value for all other coal.

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