China is the world's largest coal producer and consumer and currently accounts for about half of the global coal consumption.
The U.S. Energy Information Agency noted in its 2012 country analysis brief on China, “Coal supplied the vast majority (70 percent) of China's total energy consumption of 90 quadrillion British thermal units (Btu) in 2009,” adding, “EIA projects coal's share of the total energy mix to fall to 59 percent by 2035 due to anticipated higher energy efficiencies and China's goal to reduce its carbon intensity (carbon emissions per unit of GDP). However, absolute coal consumption is expected to double over this period, reflecting the large growth in total energy consumption.”
The World Energy Council reported that China held an estimated 128 billion short tons of recoverable coal reserves in 2011, the third-largest in the world behind the United States and the Russian Federation, or roughly 13 percent of the world's total coal reserves. Chinese coal production rose to over 3.8 billion short tons in 2011, making China the largest coal producer in the world.
Currently 27 Chinese provinces mine coal, and the country’s coal consumption is approximately three times higher than it was in 2000, with more than half of China's coal is used for power and heat generation.
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Complicating the picture, China, previously a net coal exporter, in 2009 became a net coal importer for the first time over twenty years.
So, as China needs energy imports to fuel its economy, having a coal import contract with Beijing would appear to be a sure bet.
But not necessarily, as Indonesia is discovering. For China, it’s a buyer’s market, which has allowed Beijing to drive down prices, a source of concern in Jakarta.
Indonesia, the world’s largest exporter of coal for thermal power stations, is looking to expand its export markets beyond China to absorb its increasing production, as Chinese stockpiles have caused coal prices to plummet to their lowest level since January 2010. The “invisible hand” of the market has pummelled Indonesian coal exports to China. Roleva Energy managing director Bart Lucarelli noted simply, “Indonesian producers had too much of their coal going into China and have learned a good lesson about the risk of over-relying on the Chinese market. When market conditions weakened earlier this year, Chinese coal buyers forced Indonesian suppliers to reduce their contracted coal prices by very large amounts.”
Indonesia is also facing stiffer foreign competition for the Chinese domestic coal market. Indonesian Coal Mining Association (APBI) Executive Director Supriatna Suhala noted that in Africa Mozambique, Angola and Kenya are beginning to export coal, while Mongolia, earlier importing Indonesian and Australian expertise to develop its deposits, is now beginning production and eying exports to China. Worse, when Mongolia’s 7.5 billion ton Tavan Tolgoi ("Five Hills") massive coal coking deposit becomes fully operational, it will put further pressure on all countries currently exporting coal to China. Tavan Tolgoi is the country’s second largest mining investment following the Oyu Tolgoi copper mine.
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While Mongolia’s current coal production is approximately 5 million metric tons, Mongolia is estimated to have potential coal reserves of 125 billion metric tons.
Underlining Chinese interest in Tavan Tolgoi, in 2011 Erdenes Tavan Tolgoi, the state-owned entity in charge of Tavan Tolgoi, proposed to grant 40 percent of Tavan Tolgoi’s western section to China's Shenhua Group, 36 percent to a Russian-Mongolian consortium and 24 percent to the U.S. firm Peabody Energy Corp. before the Mongolian Security Council rejected it after bidders from Japan and South Korea labeled the arrangement "unfair."
And it is not as if the Indonesian economy can absorb its coal output. According to Institute for Development of Economics and Finance (INDEF) Director Enny Sri Hartati, Indonesian industry itself does not use significant amounts of coal, so the country’s best coal winds up being exported to China and Malaysia.
China’s leadership is well aware of its impact on the international coal market. China Coal Transportation and Distribution Association head Wang Zhanjun noted that even though in 2012 China produced 3.7 billion tons, the country would remain a net importer of coal, as the amount of imported coal has grown steadily since 2009 due to the decline of the prices in the international market and low shipping costs.
So, Indonesia, Australia and other exporters can probably expect low prices through 2013, as China plays the field for the lowest prices. If it is some small consolation in Jakarta, Chinese state data shows that combined profits at 90 major Chinese coal producers plunged 22.2 percent between January-October 2010 and January-October 2011.
Time for Indonesia to diversify its client portfolio.
By. John C.K. Daly of Oilprice.com