Analysis of the Development Trends in China’s Coke Industry

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Analysis of the Development Situation of China’s Coke Industry 　-------------------------------------------------------------------------------- 1 Analysis of the supply and demand situation in China’s coke industry 1.1 Production status China is the world’s largest producer of coke, and its share continues to increase over time. In 2004, China’s coke production accounted for approximately 52% of the global total, while this figure rose to around 60% by 2008. With the rapid development of China’s steel industry, the production capacity and output of coke in the country have increased sharply. In 2000, China’s coke production was 121.84 million tons; by 2008 this figure had risen to 323.59 million tons. The average annual growth rate of production from 2000 to 2008 was approximately 13%. Affected by the financial crisis in 2008, coking enterprises above a certain scale across the country reduced their coke production by 1.2559 million tons, a decrease of 0.39%; for the first time since 1999, the coke production industry in China experienced negative growth ； Furthermore, due to high prices of coking coal, coke prices have dropped sharply, resulting in extremely low profit levels. In recent years, to promote structural adjustment and upgrading in the coke industry, China has **successively introduced a series of policies. From 2004 to 2008, the development level of the coke industry saw a significant improvement, as evidenced by the following aspects: (1) A substantial upgrade in technical equipment. During this period, approximately 85 million tons of low-quality coke produced using traditional methods were phased out across the country, and small-scale coke production facilities that caused severe pollution were shut down. The proportion of mechanically produced coke increased from 70% to 98%, with the proportion of mechanically produced coke with a carbonization chamber height of 4.3 meters or more rising from 44% to 85%. In 2008, China added 30.2 million tons of coke-making capacity, of which coke ovens with a carbonization chamber height of over 6 meters accounted for 73% of this new capacity. Advanced technologies such as dry quenching of coke and tamped coke have been promoted. Currently, 67 dry quenching units are in operation across the country. The dry quenching rate in the coking plants of steel companies has increased from less than 10% in 2004 to over 50% at present. The national production capacity for compacted coke reached 100 million tons, an increase of 66% compared to 2004. (2) Significant improvements were seen in energy conservation and environmental protection: the energy consumption per ton of coke produced by coking enterprises dropped from 145 k2 standard coal tons in 2004 to 128 kR standard coal tons in 2008. At the same time, the environmental pollution situation of enterprises has improved significantly. (3) The level of deep processing and comprehensive utilization of coking by-products has improved significantly. By the end of 2008, a number of hydrogenation and refining facilities capable of processing over 100,000 tons of coking benzene per year were put into operation; together with the acid washing and refining units, China’s processing capacity for crude benzene reached 2.5 million tons. A total of 17 methanol production plants using coke oven gas have been put into operation, with a designed capacity of 2.45 million tons per year; this figure is expected to exceed 3 million tons per year by the end of 2009. (4) The corporate structure has been significantly optimized; a number of large-scale coking enterprise groups have emerged rapidly, leading to an increase in industry concentration. Companies such as China Coal Coking, Xuyang Group, Shanxi Meijin, Shandong TieXiong, Shanjiao Group, Tangshan Jiahua, Yangguang Group, Lubao Group, and Inner Mongolia Qinghua have established production bases for commercial coke with capacities of over 3 million tons per year through self-construction and mergers & reorganizations, and are gradually expanding their industrial chains. Large coal companies such as Shenhua Group, Yanzhou Coal Mine, Kailuan Coal Mine, and Jizhong Energy have entered the coke industry, enhancing the industry’s competitiveness and concentration. The development and changes in China’s coke production and machine-made coke production from 2001 to 2008 are shown in Figure 1. 1.2 Demand situation: In China, coke is primarily used in the steel industry; it is also used in the production of chemicals such as calcium carbide as well as in other fields, and is additionally exported. In 2008, domestic consumption of coke was approximately 310 million tons, while exports amounted to about 12.13 million tons, accounting for roughly 4% of total coke production. The development of the steel industry plays a decisive role in the demand for the coke market. It is estimated that by 2010, China’s steel production will reach 550 million tons; assuming an average coke ratio of 450 kg, the demand for coke at that time will be around 248 million tons. Other industries such as the chemical industry, foundry industry, non-ferrous metallurgy, and ferroalloy industry may consume more than 9,000 tons of coke ； If the export markets remain at their current level, the demand for our country’s coke in both domestic and international markets will be around 350 million tons. It is estimated that the combined demand for coke in China’s domestic and export markets in 2015 will reach 400 million tons. 2 Analysis of the regional layout of the coke industry 2.1 Current regional distribution In 2008, 29 provinces and regions in China produced coke. Within the country’s coke industry, only 1/3 of the coke production capacity was located within steel complexes, while 2/3 was in dedicated coke plants. Most coke manufacturers are located in coal-producing areas such as Shanxi, Hebei, and Inner Mongolia; with the exception of Hebei which is relatively close to its customers, the others are far away from them. Provincial and municipal areas along the eastern coast such as Jiangsu, Shanghai, and Zhejiang, as well as southern provinces like Guangdong, Fujian, and Hainan, which have high levels of steel production and consumption, lack coke due to limited coal resources; as a result, there has emerged a situation of transporting coal from the north to the south. The key provinces and regions for coke production in China in 2008 are shown in Figure 2. The allocation of coke resources and the industrial layout in our country are unreasonable. Currently, 95% of the coking production capacity in developed countries is located within steel companies. The gas and waste heat generated during coke production can be fully utilized in steel manufacturing. In our country, steel enterprises consume around 80% of the total coke production, but only 33% of the coke production capacity is located within steel complexes; 67% of this capacity belongs to coking enterprises. The level of comprehensive utilization is currently low, and in the future it will be improved mainly through the development of chemical products. 2.2 Trends in the regional distribution of the coke industry: The “Notice on the Guiding Principles for Accelerating Structural Adjustment in the Coke Industry” issued on March 22, 2006 (Document No. Fa Gai Chan Ye 328) states that the proportion of coke produced by steel companies in the total coke production will increase from 33% to over 50%, indicating that the policies regarding the layout of the coke industry will favor steel companies. The future layout of the coal coking industry will show two trends: on the one hand, the coking units affiliated with steel companies will move closer to the locations where steel production takes place; on the other hand, **coking companies will further concentrate in areas where coking coal resources are found. Coking enterprises must have at least one advantage in terms of resources or market position in order to survive and thrive in fierce competition. The specific recommendations are: (1) The coking units affiliated with steel companies should be located closer to the steel production areas. Most of China’s steel companies are situated in coastal regions, which is related to the high degree of dependence on imported iron ore in the country. In 2008, China’s dependence on imported iron ore reached around 50%. Overall, the layout of China’s iron and chemical industries, particularly the coke production by steel companies, will move closer to that of the steel companies themselves, following them as they develop in coastal areas. (2)**Coking enterprises will move further closer to the sources of coking coal. The distribution of coking coal resources in China is shown in Figure 3. As can be seen from the chart, Shanxi holds an absolute advantage in terms of coking coal resources in China. In addition, Anhui, Shandong, Guizhou, Heilongjiang, and Hebei also have relatively abundant coking coal resources. In the future, **coking enterprises will further concentrate in these regions where such resources are found. 3 Exploration of the Development Models for Large-scale Coke Enterprises 3.1 Main Industrial Characteristics of the Coke Industry The coke industry has two most important characteristics: first, it is a mature industry with full competition ； Secondly, the coke industry is a typical highly cyclical industry. The coke industry is a mature industry characterized by full competition. It is a developed sector, with its market entering a phase of steady growth and production technologies that are already advanced. At the same time, the industry related to coke does not have high requirements in terms of capital and technology, resulting in fierce market competition. Therefore, the average return rate in the coke industry will only fluctuate around the social average return rate, and will not remain above it for an extended period. (2) The coke industry is a typical highly cyclical industry; its raw materials and markets are both very limited. The raw material is coking coal; about 80% of the market is occupied by the steel industry, with a small portion used in the production of chemical raw materials such as calcium carbide. This determines the strong cyclicality of the coke industry. The profit levels in this industry fluctuate extremely sharply; once the peak periods of prosperity in the upstream coal industry coincide with the trough periods in the downstream steel industry, the coke industry faces operational difficulties, and this is precisely the situation facing China’s coke industry at present. 3.2 Exploration of Development Models for Large Coke Enterprises Given the maturity and strong cyclicality of the coke industry, competition among the major enterprises has become increasingly homogeneous. Therefore, the author believes that to become a leading enterprise in the coke industry, it is necessary to have the ability to smooth out economic fluctuations and withstand operational risks, which is primarily achieved through vertical and horizontal integration of the industrial chain; in other words, the key to the development of large-scale coke enterprises lies in increasing the degree of integration within their industrial chains. The integration of the coke industry includes three directions: namely, \"coke-coal integration,\" \"coke-steel integration,\" and \"coke-chemical integration.\" “\"Coke-coal integration\" represents vertical integration upward, aiming to strengthen the resource foundation of the coking industry ； “\"Coke-steel integration\" refers to vertical integration downward, in order to reduce the market risks associated with the coke industry ； “\"Coking-integrated production\" represents horizontal integration, which involves making efficient use of by-products such as coke oven gas, coal tar, and coking benzene, thereby reducing risks through the diversified management of a range of products. At present, the development models for steel-related coking enterprises in our country are mainly “coking-steel integration” plus “coking-coking integration”. For example, Baosteel Group’s level of coal tar processing is among the advanced levels in China. The development models for coking enterprises are mainly \"coking-coal integration\" and \"coking-refining integration\". For example, coal enterprises such as Shenhua Group and Kailuan Coal Mine, while achieving \"coke-coal integration,\" are also vigorously developing supporting chemical industries such as the deep processing of coal tar, in an effort to achieve \"coke-chemical integration.\"