Cost pressures on coal will come from expenses to meet standards and tighter supply caused by expected pit closures
China will compel its coal industry to spend more on safety after several high-profile mine disasters in recent months underscored how soaring demand has exacerbated substandard conditions in the nation's coal mines.
China's over-stretched mining industry is struggling to supply the power sector, which consumes some 54 per cent of the nation's coal output.
The mine at Fuxin, Liaoning province - where an explosion last Monday killed more than 200 miners in the deadliest coal mine accident reported by the government since 1949 - had reportedly been working through the Lunar New Year holiday. Some workers have said they had only one day off in a year.
While official statistics from the State Administration for Coal Mine Safety show a mining death toll of 6,027 last year - 150 fewer than in 2003 - independent estimates put the number at up to three times higher. Coal safety varies widely province from province. Guizhou, which accounted for 6 per cent of national coal output last year, reported the most coal mining deaths last year at 894, followed by 562 from Sichuan.
Shandong, which produced 10 per cent of total output, reported only 51 deaths.
In November, Premier Wen Jiabao reiterated the leadership's determination to expose poorly managed mines and improve safety technology.
Compounding the problem is the huge number of illegal mines, which are routinely shut down following major accidents but reopened after the inspectors have left. Most are small operations hastily begun under the auspices of local officials to cash in on high spot prices for coal.
According to the China Coal Industry Association, output from small county-level mines grew much faster than output from large mines, and accounted for 35 per cent of the nation's total production last year.
Officially, 61.35 per cent of China's coal is extracted from mines that meet government safety standards. But there has been little incentive to shut down the remaining mines while demand for coal is skyrocketing, until a fatal accident is reported.
Should Beijing prove to be serious about improving mine safety, coal prices are bound to rise.
'Mines are operating overtime to meet demand without regard to safety standards,' said UOB Kay Hian associate director Foo Choy Peng. 'Beijing will tighten further safety checks on mines and close down unsafe ones, so supply will worsen this year, which will support firmer coal prices.'
China's coal demand is estimated at 2.15 billion tonnes this year, 7.5 per cent lower than the projected domestic supply of two billion tonnes. Wu Yuxiang, chief financial officer of Shandong-based Yanzhou Coal Mining, the listed flagship of one of China's largest coal-mining groups, said the government had been tightening implementation of safety regulations year after year.
'This covers investment in safety facilities, financial compensation for workers injured or killed in accidents and punishment of management wrongdoings,' he said.
In the first half of last year, the government imposed an eight yuan fee on each tonne of coal production to be used for safety-related purposes.
Yanzhou Coal said investment in new safety protocols at production facilities cost the company 1.1 yuan per tonne more in 2002 than in 2001, accounting for 28 per cent of the total increase in cost for each tonne sold.
Meanwhile, China is also under international pressure to reduce reliance on cheap, high-sulphur 'soft' coal in favour of 'hard', low-sulphur varieties. Most of China's enormous coal reserves are of high-sulphur varieties. Sulphur emissions combine with atmospheric water vapour to produce acid rain.