It is now 17 years since China became a net importer of oil in 1993. This change of status from a significant net exporter of oil to a rapidly growing net importer triggered a range of new strategies on the part of China’s government and of its national oil companies: diversification of sources of oil imports, investment in overseas oil exploration and production, the construction of oil import pipelines, the building of strategic oil stocks, the provision of loans in return for oil supplies, and the overt practise of energy diplomacy.
Coal has been the dominant source of commercial energy supply throughout the 100 years of modernisation in China, on account of the large scale of domestic resources of this fuel. Throughout most of this period the country has been a net exporter of coal. The level of net exports reached a peak in the years 2001 to 2003 when total annual exports of coal rose to between 80 to 95 million tonnes, and net exports reached as high as 90 million tonnes.
After two years in which imports and exports were in close balance, the year 2009 saw total imports of coal rise to 135 million tonnes and net imports to about 115 million tonnes. In May some commentators were suggesting that total coal imports could rise to 170 million tonnes in 2010.This raises the question as to whether the surge of cola imports is a temporary aberration or the start of a new trend which may affect the coal industry around the world.
Demand for coal in China is driven principally by the electrical power industry which accounts for 55-60% of annual coal consumption. Both total generating capacity and annual power consumption doubled between 2003 and 2009, and about 80% of the incremental capacity was fuelled by coal. In addition to thermal coal for power generation, the country also uses a great deal of coking coal to support its growing steel industry which in turn underpins to continuing, massive urban construction and infrastructure programmes. These and other industries have pushed annual consumption of coal from 1.45 billion tonnes in 2002 to 3.0 billion tonnes in 2009. China now accounts for more than 45% of total world production and consumption of coal. Demand for coal in China is expected to rise by at least 8% in 2010.
Over the last few years, China has been investing heavily in new coal mines, especially in Xinjiang, Ningxia and Inner Mongolia. These provinces lie further from the centres of demand for coal than Shanxi Province, which has been the traditional supplier. The extraction of coal from these progressively more remote locations has required parallel investment in transportation infrastructure, mainly railways, to carry the coal to where it is needed in eastern, southern and central China. This investment has allowed production to keep pace with demand in most years, depending on stock-piling policies and transportation bottlenecks. Further, the implementation of policies to consolidate some coal mines and close others has also constrained supply at times, and the drought in southern China early in 2010 caused a short-term rise in demand for coal at thermal power stations to compensate for the shortage of hydro power.
National output capacity of coal reached 3.6 million tonnes by the end of 2009 and is set to rise to 3.8-4.0 million tonnes by 2015. As a consequence, some officials have been forecasting an oversupply of coal in 2011 and 2012, despite the high level of imports in the first half of 2010.
The period since 2003 has seen a steady decline in the annual level of coal exports, from 95 million tonnes in 2003 to 22 million tonnes in 2009. This trend arose from the tightness in the domestic coal market which in turn resulted in domestic prices being higher than international prices, in the removal of policy instruments favouring exports, in the implementation of an export tax on coal, and in the reduction in the volume of export licenses for coal. On the other hand, the process for acquiring import licenses was simplified and the tariffs on coal imports were reduced. Annual imports of coal rose from 10 million tonnes in 2003 to 137 million tonnes in 2009.
Though China’s net imports of coal in 2009 amounted to less than 4% of the country’s annual consumption, they accounted for 12% of internationally- traded coal, up from less than 1% in 2008. In 2009 China was the second largest importer of both steam and coking coal, after Japan, and ahead of South Korea.
This surge in demand for coal in China has not only pushed up coal prices around the world but has allowed some producers to sell to China for the first time. Mongolia is set to replace Australia as the main supplier of coking coal to China. Indonesia continues to build its lead of Australia as a supplier of thermal coal to the Pacific market. Further afield, coal mines in the USA, South Africa and Colombia have switched their exports away from the depressed economies of the Atlantic region to the more vibrant economies of the Pacific, especially China.
The last two years have seen Chinese companies from different industrial sectors acquire stakes in coal resources or in coal mining companies in Australia, Indonesia and Mongolia: for example, the Metallurgical Corporation of China, China Huaneng Power, China Power International, the Yanzhou and Shenhua Coal Mining Groups, and the sovereign wealth fund, China Investment Corporation. In August 2010, China showed that it was applying yet another instrument from its portfolio of oil strategies when it announced that it was lending US $ 6 billion to Russia in return for an enhanced level of coal supplies for a period of 25 years.
The outlook for China’s future impact on international coal markets depends greatly on the direction of domestic energy policy and trends in China’s energy sector. Total energy demand will be driven by economic growth, the structure of the economy and energy efficiency. Though China is taking steps to constrain the rate of growth of energy demand, the degree of success fluctuates. Likewise, the government has been trying to reduce the proportion of coal in the fuel mix for 15 years or more, but each surge of economic growth reverses the earlier gains. Sustained improvements should now be possible with the planned growth of renewable energy and nuclear power, and these could be further enhanced if unconventional gas can be extracted in large volumes.
The final, and possibly the key variable, is the future level of domestic coal production. Though the country does indeed possess large reserves of coal, the new mines lie in progressively more remote locations. The level of investment needed will be enormous just to maintain annual output at more than 3.5 billion tonnes per year and to transport this coal to where it is used, let alone to add further to this capacity. Thus it is not surprising to hear that some officials are suggesting that China make a deliberate decision to cap annual coal output at 3.8-4.0 million tonnes. If this approach is taken, then the level of imports is certain to remain high and possibly rise over the coming years.
So, will the impacts of China’s appetite for foreign coal be similar to those arising from its need for oil?
After 17 years of net oil imports and with imports accounting for more than 50% of oil consumption, China’s imports of crude oil account for just 11 % of internationally-traded crude oil. In contrast, in the second year of net imports of coal and with imports accounting for 4% of consumption, China accounted for 12% of internationally-traded coal. Thus, relatively small fluctuations in China’s balance of supply and demand can have a substantial impact on the international coal market and on coal suppliers. Yet, because the number of coal exporters is relatively small, and because most of these countries are relatively stable, the political ramifications of China’s international coal strategies are likely to be less than is the case for oil.