China Shenhua wants to be the Wal-Mart of coal

PUBLISHED : Tuesday, 29 March, 2011, 12:00am
UPDATED : Tuesday, 29 March, 2011, 12:00am

China Shenhua Energy has budgeted 15.9 billion yuan (HK$18.86 billion) this year to expand transportation and logistics infrastructure as part of its strategy to become a one-stop-shop Wal-Mart in the coal business.

The listed unit of the nation's largest coal producer, Shenhua Group, aims to reap more profit from distribution operations to hedge the risk that high coal prices may drop.

Setting up four coal logistics bases is part of that strategy, chairman Zhang Xiwu said yesterday.

'Everyone knows that Wal-Mart is a very competitive firm - we want to become the Wal-Mart in the coal sector,' he said. 'Part of our strategy is to build several storage bases to help raise our market share and enhance our capability to cope with risks when supply exceeds demand.'

Shenhua's board approved a plan to set up a joint venture with power producer Guangdong Yuedian, which will build a coal warehousing and transportation centre in Gaolan, Zhuhai. China Shenhua has a 40 per cent stake in the venture.

Chief executive Ling Wen said the project would cost 'several billion' yuan. The firm has a 40 per cent share in the central government's planned five million tonne a year national coal storage programme.

In addition to Gaolan, China Shenhua also plans storage facilities in Guangzhou, Jiangsu and Fujian provinces - regions where coal prices are high and supply is tight.

The 15.9 billion yuan investment - 152 per cent higher than last year - will also go towards railways and ports. The logistics spending amounts to 44 per cent of 26.2 billion yuan of total capital expenditure planned for this year, a third higher than that spent in 2009.

Spending for coal mining is budgeted to rise 29 per cent to 15.5 billion yuan while power generation is set to fall 45 per cent to 4.6 billion yuan.

The logistics facilities expansion is linked to China Shenhua's strategy in procuring and selling coal sourced from third parties.

Zhang said strong demand so far this year meant sales could reach 360 million to 370 million tonnes, of which 260 million to 270 million tonnes would be self-produced and 100 million tonnes sourced from other miners.

Last year it produced 224.8 million tonnes, up 6.9 per cent from 2009, while sales rose 15 per cent to 292.6 million tonnes. Coal sourced from third parties soared 62 per cent to 72.4 million tonnes.

To dilute the impact from a state-ordered ban on price increases in coal contracts, China Shenhua plans to raise sales to the spot market to 45 to 50 per cent of total sales, down from last year's 52 per cent.

It aims to keep unit production cost rises to within 10 per cent, after costs rose 14.4 per cent last year.

Venture share

Shenhua is to set up a joint venture with Guangdong Yuedian

China Shenhua's stake in the venture amounts to this percentage: 40%

The 15.9 billion yuan expansion plan is this percentage higher than last year: 152%

The logistics spending amounts to this percentage of total capital expenditure: 44%