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China Coal Energy Company

The core businesses of China Coal, are coal production, coal chemicals and coal-bed methane exploration, mine building and coal mining equipment manufacture. It was spun off from the Ministry of Coal Industry in 1999, and held a HK$15.1 billion initial public offering in Hong Kong in 2006. In 2008, it raised 25.7 billion yuan through an IPO in Shanghai.

Shenhua allots 100b yuan to develop big coal mines

PUBLISHED : Monday, 04 May, 2009, 12:00am
UPDATED : Monday, 04 May, 2009, 12:00am

China Shenhua Energy plans to spend 100 billion yuan (HK$113.58 billion) over the next five years on two large-scale coal-mining projects in Shaanxi and Inner Mongolia.

Company secretary Huang Qing said the listed energy flagship of the nation's largest coal producer, Shenhua Group, was doing the groundwork for the two projects, each of which may have an annual output capacity of 100 million tonnes.

The projects are similar in scale to Shendong mine, Shenhua's largest, which straddles the two provinces and where output last year amounted to 117.8 million tonnes - 63.43 per cent of the company's total output of 185.7 million tonnes.

'Our development focus will remain on the mainland, specifically Inner Mongolia and Shaanxi,' Mr Huang said. 'The two projects are in the periphery of our Shendong mine so they can tap into our existing workforce and transport channels.'

The projects, to be located in Yulin in Shaanxi and Xinjie in Inner Mongolia, will combine the development of new mines and the overhaul of small, inefficient and unsafe mines that face shutdown.

Although the economic slump has reduced power and coal demand, Mr Huang said the management was confident market demand would absorb output from the two new projects.

Based on the country's coal demand of 2.74 billion tonnes last year, and on assumptions that the economy will grow 8 per cent annually and coal demand will grow 6 per cent, he estimated total new coal demand would amount to 800 million tonnes over the next five years.

Given also that an estimated 400 million tonnes of small coal mine capacity face closure in the period, the market had room to absorb 1.2 billion tonnes of fresh capacity from new mines, said Mr Huang.

Of the 200 million tonnes of output from the two planned projects, only 60 per cent, or 120 million tonnes, would be sold to coastal regions, with most of the rest turned into chemicals and power locally.

Mr Huang noted the 120 million tonnes of output represented only 10 per cent of the national coal capacity requirement in the next five years, not an overly aggressive target compared with Shenhua's market share of about 7 per cent.

Shenhua's plan comes despite a warning from the Ministry of Land and Resources last month that the mainland's coal market faced 'relatively large oversupply pressure in the next two years' given a large number of mining licences had been given out in the past two years.

The ministry stopped granting exploration licences from the second half of 2006 and decided last month to continue the ban in view of the oversupply risk. Still, Beijing has been encouraging large players to consolidate the fragmented coal industry.

Mr Huang said Shenhua had signed sufficient contracts to reach its target of selling 75 per cent of its targeted sales of 220 million tonnes through contracts, with the remainder through the spot market, in line with ratios in previous years.

He declined to say whether the company had signed any contracts with the five national state-owned power generation groups, with which the coal major has been in a deadlock over this year's contract price negotiations since December.

Analysts believe most of its contracts were signed with power firms other than the big five that formed an alliance to oppose the coal major's price rise demands. The big five control about 45 per cent of the nation's power generation capacity.

Of the contracts signed by Shenhua, those with a heating value of 5,500 kilocalories per kilogram for delivery at the Qinhuangdao coal port in northern China were sold at 540 yuan a tonne, up 17.4 per cent from a year earlier and about 7 per cent less than the spot price of 580 yuan.

The five power majors have insisted they will only accept price rises of less than low single-digit percentages, but some analysts say they may be more accommodating towards Shenhua, whose price increases were less than that of the industry last year.

The spokesmen for Shenhua rivals Yanzhou Coal Mining and China Coal Energy said they had not signed any contracts with the five power majors.

Analysts said from the power producers' point of view, the difference between signing purchase contracts and buying on the spot market was not substantial as most market participants expected coal prices to remain relatively steady this year amid weak demand and output cutbacks.

Mr Huang said he expected the price of 5,500 kilocalories coal to range between 550 yuan and 650 yuan per kilogram for the rest of the year.

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