Analysis of coal supply and demand in 2007 and forecast of market trends for 2008

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Since the beginning of this year, the coal market has remained stable at relatively high levels, with supply and demand basically in balance. Thermal coal is in a typical state of supply-demand equilibrium, and no widespread shortages occurred even during the Spring Festival travel season, the Spring Festival holidays, or the period of peak summer demand; however, supply and demand for coking coal have remained tight. Overall, there was strong demand and supply, as well as active trading, with prices fluctuating upward. Entering September, coal prices saw a general rise, reaching record highs. As for the future trend of the coal market, this article makes predictions for 2008 by conducting a quantitative analysis of coal supply and demand in 2007 and taking into account the factors that influence the operation of the coal market. I. Quantitative Analysis of Coal Supply and Demand 1. In terms of coal supply, production growth has remained steady, the overall supply level is stable, and daily sales volumes are relatively consistent. Railway transportation and port handling of coal have seen rapid growth; imports and exports have shifted from a net export situation to a net import situation, although the volume of net imports is relatively small. (1) Coal production. According to **statistics bureau data, the growth rate of raw coal production in coal mines above a certain scale reached 11% by September. Looking at the figures for each month, aside from January and February when production experienced significant fluctuations due to the Spring Festival holidays, the growth rate remained stable in the remaining months, with year-on-year increases ranging between 8.2% and 12.7% ； The average daily coal production remained within a stable range of 6.17–6.79 million tons during the second and third quarters. In 2006, the national coal production was 2.38 billion tons. Based on an annual growth rate of 11%, coal production in 2007 was 2.64 billion tons, representing an increase of 260 million tons compared to the previous year. Using a conversion factor of 0.7143 for standard coal, this corresponds to an increase of 186 million tons of standard coal. (2) Coal sales. From January to September, the national sales volume of commercial coal amounted to 1,689.22 million tons, an increase of 150.348 million tons compared with the previous year, representing a year-on-year growth rate of 9.8%. From January to September this year, the average daily coal sales volume across the country was low in January and February, while it remained between 6.26 and 6.67 million tons from March to September. Even during the peak demand period of summer, there was no significant increase in the average daily sales volume, which is different from the upward trend seen month by month during the same period last year. (3) Coal railway transportation: Since the significant speed increase on railways in April, the volume of coal transported has seen an increase. From January to September, the volume of transport was 913.185 million tons, an increase of 86.281 million tons compared to the previous year, representing a year-on-year growth rate of 10.4% ； Railway coal transport accounted for 54% of total coal sales, an increase of 3.3 percentage points compared to the whole of last year. Looking at the year-on-year growth in the average daily coal transport volume via railways across the country, after April, only in July was the figure 15.5%, exceeding the target of 12% for freight transport growth due to the increased speeds; in all other months, the figure was below 10%. (4) Port transshipment: From January to September, the volume of coal transshipped through ports was 348.444 million tons, an increase of 47.512 million tons compared with the previous year, representing a year-on-year growth rate of 15.8%; this figure was 5.9 percentage points higher than that for the entire previous year. . In terms of the average daily coal transfer volume at ports across the country, it was below 1.3 million tons from February to May, while it was above 1.3 million tons in the other months; it reached around 1.34 million tons in July and August. (5) Import and export factors led to a slight increase in the domestic supply of coal resources. From January to September, coal exports amounted to 38.0055 million tons, a decrease of 10.0609 million tons compared with the previous year ； Imports amounted to 38.6106 million tons, an increase of 12.495 million tons compared with the previous year; the net import volume was 605,100 tons. It is expected that imports and exports will be roughly in balance for the whole year. Taking into account the decline in exports and the increase in imports, domestic coal supply from January to September increased by 22.5559 million tons compared to the same period last year. Calculation of total coal supply: According to data from the Dispatching and Statistics Department of the **Safety Inspection Bureau, as of the end of December 2006, coal inventory in domestic coal mining enterprises amounted to 41.516 million tons. This coal entered the market in 2007, thereby creating a supply capacity equivalent to approximately 29 million tons of standard coal. Taking into account the factor of a roughly balanced import and export volume, the impact on domestic coal supply is minimal; according to the previous calculations, coal production in 2007 increased by 186 million tons of standard coal compared to the previous year. It follows that the increase in coal supply in terms of standard coal in 2007 was approximately 205 million tons. 2. In terms of coal demand: The four major coal-consuming industries—electricity generation, steel production, building materials manufacturing, and the chemical industry—are experiencing rapid growth, resulting in a significant increase in coal consumption. (1) Increase in coal used for electricity generation: In the first 9 months, the amount of electricity generated through thermal power plants was 1,987.4 billion kWh, an increase of 284.4 billion kWh compared to the previous year ； The annual electricity generation from thermal power is expected to be 2,650 billion kWh, an increase of about 330 billion kWh compared to the previous year. Assuming 355 grams of standard coal are consumed per kWh, the increase in coal consumption will be around 117 million tons. (2) Increase in coal consumption for steel production: Crude steel production in the first 9 months was 362,732.1 million tons, an increase of 54,286 million tons compared to the previous year ； The annual crude steel production is expected to reach 485 million tons, an increase of about 65 million tons compared to the previous year. Assuming a comprehensive energy consumption of 0.65 tons of standard coal per ton of steel, the additional consumption of standard coal will be around 42 million tons. (3) Increase in coal consumption for cement production: Cement production in the first 9 months was 984.19 million tons, an increase of 65.5909 million tons compared to the previous year ； The annual production is expected to reach 1.31 trillion tons, an increase of about 110 million tons compared to the previous year. Assuming that 0.15 tons of standard coal are required per ton of cement, the increase in standard coal consumption will be around 16 million tons. (4) Increase in coal consumption for the chemical industry: The production of synthetic ammonia and fertilizers is also increasing rapidly, which means that coal consumption will rise as well; preliminary estimates suggest an increase of 500 million tons of standard coal consumption for the whole year. (5) Increase in coal consumption in other industries: A proportional relationship of 0.11 was identified upon comparing coal consumption in other industries with that in the four major industries for 2006 and the first 9 months of 2007; based on this, the increase in standard coal consumption in other industries is estimated to be around 20 million tons. Calculation of total coal demand: Based on the above calculations, the increase in standard coal consumption by the four major industries in 2007 was approximately 180 million tons ； In 2007, the increase in standard coal consumption across the country was approximately 200 million tons. 3. Comparison of coal supply and demand: As mentioned above, in 2007 the increase in coal supply in terms of standard coal was about 205 million tons, while the increase in demand for standard coal was around 200 million tons; these increases were roughly equal, resulting in a basic balance between supply and demand. II. Analysis of the factors that influence the future trend of the coal market. Against the backdrop of global economic integration, there is an increasing interaction between international and domestic markets. Looking at the various factors affecting the trend of the domestic coal market, there are factors that support continued improvement in this market, as well as factors that restrict an increase in coal demand. (1) Factors conducive to the healthy operation of the coal market 1. The continuous rise in prices of resource-based products and commodities worldwide supports a positive trend in the coal market, with prices continuing to increase. Recently, prices of energy products, mineral products, metals, and precious metals in the international market have reached new highs repeatedly. Crude oil prices surged significantly, with the New York benchmark crude oil price closing at $94.53 by October 31 ； The CIF price of Indian iron ore rose to $118–$119 per ton in mid-October ； On October 31, gold futures prices in the New York market exceeded $800 per ounce ； The international comprehensive steel price index reached 170 points, up 20 points from the beginning of the year. All of these have created an international economic environment conducive to rising coal prices; the spot price of the BJ index reached as high as 73.4 dollars per ton, while the CIF price in the European market was 100 dollars per ton. Recently, South Korea and Australia reached an agreement on the supply of some thermal coal for fiscal year 2008, with a FOB price of $65–66 per ton, up by 25–35% from last year. During the initial discussions on thermal coal supply between Japan and Australia, the suppliers proposed a high price of 77–78 dollars per ton. It is expected that in 2008, the upward trend in prices of resource-based products and commodities will continue, although at a slower pace. This will provide strong support for domestic coal prices, keeping them on an upward trajectory. 2. From a macro perspective, the policy direction for the sound and rapid development of the national economy has been established; economic growth will lead to a steady increase in demand for coal. The report of the 17th National Congress stated that it is necessary to enhance coordination in development efforts in order to achieve sound and rapid economic growth. Significant progress has been made in transforming the mode of development; by optimizing the economic structure, improving efficiency, reducing consumption, and protecting the environment, it is planned to double per capita GDP by 2020 compared to 2000. Furthermore, driven by the Olympic economy and the effects of the leadership change, GDP is expected to maintain a reasonable growth rate in 2008. Given that China is in a stage of social development characterized by urbanization and industrialization, the development of the national economy will inevitably lead to rapid growth in the heavy industry sector. Based on an analysis of this round of growth and various indicators for the first three quarters of this year, it can be seen that China’s macroeconomy will continue to experience high-level growth in 2008, with a GDP growth rate of around 11%, and it will reach the peak phase of a cyclical boom. On an annual basis, we expect the peak of economic growth to be in 2007, while on a quarterly basis, this peak could occur in the first half of next year. Starting from the second half of 2008, the economy will enter a period of moderate adjustment. 3. The key coal-consuming industries are performing well. From January to September 2007, the revenue generated by the four major industries of electricity, steel, building materials, and chemicals increased by 21.09%, 38%, 33.63%, and 20.02% respectively on a year-on-year basis ； The year-on-year growth rates of total profits were 41.9%, 58.88%, 63.98%, and 52.27%, respectively. It can be seen that the profit growth rates were 20.81%, 20.88%, 30.53%, and 32.25% higher than the revenue growth rates, respectively. The main reason for the high profit growth is the continuous rise in prices of other products, aside from the stable electricity prices; from January to September, the domestic steel price index increased from 108 points at the beginning of the year to 115.1 points ； Cement prices have risen by 3–30 yuan per ton since the beginning of the year ； Taking the chemical industry as an example, with urea as a case in point, there is a shortage of large-grain urea in some areas of the country, leading to a significant increase in prices, which range from 1,620 to 1,760 yuan per ton. It is expected that in the fourth quarter and throughout 2008, the growth trends in revenue, profits, and product prices for the major coal-consuming industries will continue, although the rate of growth will decline. 4. Transport bottlenecks remain a significant factor affecting coal supply. In terms of rail transport, according to relevant sources, coal transportation capacity via railways was still generally tight in 2008; this was due to overall constraints in the railway network’s capacity. Apart from slight increases in capacity on the Daqin Line and Binzhou Line in the north, there were no improvements in capacity in the central and southern regions. Furthermore, to meet the needs of increased train speeds, 30,000 trains that are not suitable for such higher speeds will be phased out next year, but only 25,000 new trains will be introduced, resulting in a total reduction of 5,000 trains in service. The railway sector can only improve efficiency through better transportation organization; given a fixed capacity of the transport routes, it must accelerate the turnover of vehicles. Therefore, the bottleneck effect of railways remains an important factor affecting coal supply. In terms of road transportation, following the implementation of weight-based tolling for vehicles, starting from October 22, the highway traffic police in Shanxi Province began to carry out targeted inspections on large freight vehicles; large trucks with a total weight of over 49 tons are prohibited from entering highways. This measure will directly reduce the overall volume of coal transported by road, having a significant impact on the coal supply in regions surrounding Shanxi such as Hebei, Henan, and Shandong, which previously relied heavily on road transport for coal, thereby exacerbating the shortage of coal supplies. 5. Governance and rectification measures have effectively reduced the unsafe coal mining capacity. Since the campaign to shut down small coal mines began in August 2005, a total of 9,449 such mines have been closed by the end of September this year; 3,185 of them were closed between 2007 and September. The total number of mines closed by the end of the year is expected to exceed 10,000, with nearly 13,000 mines still remaining ； Currently, there are approximately 3,000 small coal mines across the country with a production capacity of less than 300,000 tons, bringing the total to nearly 16,000 such mines. To achieve the closure targets set in the 11th Five-Year Plan for the coal industry, by 2010 the number of small coal mines across the country was to be reduced to 10,000, with a production volume of 700 million tons. Therefore, in the three years following the 11th Five-Year Plan period, the tasks of rectifying and closing small coal mines as well as adjusting and optimizing the coal industry structure remain arduous, and relevant departments will surely step up efforts in safety management and rectification in 2008. 6. There is a possibility that inflation pressures may ease, and the likelihood of a third round of adjustments to coal and electricity pricing policies is increasing. Recently, the **National Development and Reform Commission has successively adjusted the prices at which power generated by newly commissioned power plants in Shanxi and Inner Mongolia is supplied to the Beijing-Tianjin-Tangshan region, as well as the prices at which power from newly built plants in eastern Inner Mongolia (excluding the 3.6 million kilowatt project in the Hulunbuir coal and electricity base) is supplied to Liaoning Province. It has also adjusted the prices at which power from Heilongjiang Province is supplied to Liaoning Province. Although these two local electricity price adjustments were not linked to coal-fired power generation, they were still driven by cost factors. Therefore, the explanation regarding electricity price adjustments shows that the overall trend in electricity prices is quite clear. The persistently high CPI levels this year have delayed electricity price adjustments. If CPI returns to a reasonable level in the first or second quarter of next year, a third round of coal-electricity linkage measures will surely be implemented, creating room for an increase in the contract prices for thermal coal. (II) Factors restricting the increase in coal demand 1. Lowered expectations for global economic growth, weakening growth in energy demand Due to the turmoil in credit markets triggered by the U.S. subprime mortgage crisis, the International Monetary Fund reduced its forecast for global economic growth in 2008 to 4.8%, a decrease of 0.4 percentage points from earlier estimates; the forecast for U.S. economic growth was lowered from 2.8% to 1.9%. Given the position of the U.S. economy in the world, as well as Sino-U.S. trade relations, the future trend of the U.S. economy could have a significant negative impact on the global economy and the Chinese economy, leading to a slowdown in global economic growth and a reduction in energy demand. 2. **The effects of the regulatory measures aimed at controlling exports are gradually becoming apparent, with a significant slowdown in export growth. To curb the excessive growth of the trade surplus and reduce pressure on environmental resources, a series of policies and measures were introduced to control the export of primary products, and their effects are now starting to show.** In September, total exports increased by 22.8% on a year-on-year basis, with an overall year-on-year increase of 27.1%. This figure was 28.8 percentage points lower than that in February, the highest value seen so far this year, and 11.4 percentage points lower than that in July, the second-highest value. Looking at steel exports, net exports reached a peak of 5.528 million tons in April, before declining month by month to 3.012 million tons in September. In terms of cement exports, the net export volume reached 407 million tons in April, before declining month by month to 3.16 million tons in September, falling below the level of the same period last year. It is expected that in the future, the slowdown in the overall growth rate of exports, as well as the decline in the net exports of coal-intensive products such as steel and cement, will continue. 3. In-depth efforts to save energy and reduce emissions have helped to lower the coal consumption intensity in key coal-intensive industries. Energy conservation and emission reduction have become a focus of current macroeconomic regulation, as well as a breakthrough point and an important means for adjusting the economic structure and transforming the mode of growth. Curbing the rapid growth of energy-intensive and polluting industries such as electricity, steel, non-ferrous metals, building materials, petroleum processing, and chemicals is an urgent task in advancing efforts to save energy and reduce emissions. To date, phased results have been achieved, with 10.13 million kWh of small-scale thermal power generation shut down ； The ten provinces (regions and municipalities) including Hebei and Shanxi, which were part of the first wave of efforts to shut down and phase out outdated production capacity, have cumulatively shut down or phased out 9.69 million tons of outdated iron smelting capacity and 8.73 million tons of outdated steel manufacturing capacity ； Other industries have also successively released lists of companies to be phased out for their outdated production capacity. In terms of specific consumption metrics, from January to September, thermal power generation consumed 355 grams of standard coal per kilowatt-hour, a decrease of 8 grams per kilowatt-hour compared to the previous period ； The comparable energy consumption per ton of steel was 609.61 kilograms of standard coal per ton, a decrease of 2.3% on a year-on-year basis. In addition, the Standardization Management Committee is formulating 22 energy consumption limit standards for high-energy-consuming products, aiming to raise the entry barriers for new projects in key energy-intensive industries, phase out outdated production capacities within these industries, and force them to reduce energy consumption and emissions. These standards are expected to be issued and put into effect within this year. III. Forecast for the coal market in the coming months and in 2008 Based on the supply and demand situation of coal in 2007, taking into account the international economic landscape, as well as the domestic economic environment, key national policies, and industry regulations, it can be preliminarily inferred that in the coming months, supply and demand for coal will remain generally in balance. The peak season for coal usage comes during the winter heating period, coinciding with New Year’s Day and Spring Festival; coal supply will be affected by mine closures and the spring travel rush, leading to temporary shortages in certain areas. In 2008, the overall balance between coal supply and demand is unlikely to change. Due to limited increases in railway capacity for coal transport and constraints imposed by transportation bottlenecks, thermal coal supply may shift from its current state of balanced supply and demand to one where supply is slightly tighter, leading to rising price fluctuations. The extent of these price increases will depend on whether the third round of coordination between coal supply and electricity production can be implemented ； Steel exports are expected to continue on a downward trend, and the shortage of coking coal supply may ease, yet supply and demand will remain tight, leading to moderate price increases; the overall increase will be less than that in 2007.