[20081112]Analysis of Economic Operation of Coal Industry-20081112 Shanghai S

Summary of Coal Industry in 2008 and Forecast of Coal Market in 2009
Events:
China Coal Industry Development Center and Shenyin Wanguo Securities Research Institute together held a Seminar on the Analysis of Economic Operation of Coal Industry in 2008 and Forecast of Coal Market of 2009 lately in Beijing. The seminar invited National Development & Reform Commission, China Coal Industry Development and Research Center, experts of coal industry, representatives of coal dealers and coal enterprises to discuss China’s coal market in 2008 and forecast the prospect of coal market in 2009. We made a summary of the major viewpoints on this seminar as follows.
Main Viewpoints:
The continuous growth of fixed asset investment in coal industry ensures coal supply capacity.
Since 2002 fixed asset investment in coal industry kept a substantial increase for successive six years with an accumulated value of 557.4 billion Yuan. Investment in coal mining and dressing reached 156.2 billion Yuan in preceding nine months of this year, up 41.6% year on year, and accounting for 1.6% in the total fixed assets investment of cities and township. In view of the growth tendency of the scale of fixed asset investment in coal mining and dressing industry, coal production capacity will remain in growth phase in next two years. According to statistics, the total fixed asset investment in coal mining and dressing industry reached 425.035 billion Yuan from 2006 to the end of 2008, which means production capacity will increase by 700 ~ 800 million tons in next two or three years. Coal supply will keep turning loose.
Coal transport remains tense at present
China’s producing areas of coal are mainly located in Shanxi and Shaanxi and Inner Mongolia while consumer markets are in eastern coastal region. So China’s coal flows from west and north to east and south, fanning out towards east and south based on Shanxi and Shaanxi and west of Inner Mongolia as the production center. Generally coal transport relies on railway, highway, inland rivers and coastal shipping. In 2007, 1.544 billion tons coals were transported by railway in China, accounting for 60.9% of the coal output and 49.3% in total volume of freight transport. But major coal production bases in our country do not have enough capacity to ship out coals by railway. So many enterprises have to count on highway transport. North transport channel and middle transport channel are relatively tense while south channel can basically ensure the supply. As a result, the Daqin Railway has an urge need to expand its transport capacity. Railway transport capacity in eastern Inner Mongolia, Hubei Province, Hunan Province and Jiangxi Province is critically inadequate and is waiting for improvement.
Electric power demand will slow down and high-quality steam coal is still in short of supply.
Due to global economic recession, countrywide demand of electric power will saw a big year-on-year slide. We forecast the total consumption of electric power grows by 8% in 2008 and would drop to 6~8% in 2009. So the demand of coal use for power generation will also slow down correspondingly. However, the demand of high-quality steam coal is still large because the standard of most new generator units is designed on the basis of high-quality steam coal which has high calorific value and the economic efficiency of these generator units can be significantly improved by burning high-quality steam coal. In addition, high-quality steam coal can help to lower transport cost, maintenance expense and emission of pollutants. Therefore, high-quality steam coal above 5500 Kcal will still in short supply in the future and the supply of coal below 4700 Kcal is expected to be sufficient relatively.
Coking coal is heavily impacted as steel output sharply rolled back
Since the second half of 2008 domestic steel output saw a negative growth. Calculated on the basis of the daily average steel output in September, the yearly output of crude steel is 510 million tons, a growth of 4.3% from last year, which dropped 11 percentage points. Some medium and small size steel plants shut down currently and some coking coal enterprises prolonged the time of carbonization. The decline of steel price leads to the decrease of coal use for steel production. Some steel companies require stopping delivery for the moment. The price of metallurgical fine coal and blast furnace coal generally fell more than 300 Yuan. 
 
Conclusion:
The market price of coal has some space for downturn influenced by the slowdown of downstream demand and stable supply growth. But the space is limited because coal demand will receive some support as winter comes and the contribution of water and electric power decreases. We forecast the supply and demand situation will be looser and price of contract coal will gradually approach the market price in 2009. High-quality steam coal will remain in short supply and coking coal will largely rely on the recovery of steel industry.
 
Thanks and Best regards,

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