HERB ALERTBUYING GOBI NOW WOULD BE WISE, FOR THE FIRST QUARTER
I SEE GOBI AT $20>00 sometimes in the first quarter
Very Bullish for those selling to China, IMO. Of significant note was the following comment:
“Our recent discussions with China Shenhua Energy and China Coal suggest that this year’s coal imports are on course to exceed 100mt in 2009, and might rise to 200mt/year over the next several years.”
China’s Coal Supply Constraints – Perspectives from a Major Power Producer, Hands-on China Alert, Jing Ulrich
I recently met with the senior management of Datang International Power to discuss some of the challenges that power producers are having with sourcing domestic coal and the factors behind the greater reliance on imports in recent months. Datang, together with its parent company, has 95GW installed capacity – representing 11% of China’s total installed capacity and the highest among power producers in Asia. This feedback generally reinforces our positive outlook on coal demand and domestic prices. Some key points:
- During October, maintenance work on the Daqin railway seriously constrained supply and resulted in a sharp drawdown in coal inventories at China’s main coal port of Qinhuangdao, to levels below 4 million tons. Subsequently, weather disruptions delayed outbound coal shipments, resulting in an inventory build-up above 8 million tons within a span of 15 days. Despite the sudden rebound at Qinhuangdao, inventories are still tight around the country – inventory at Guangzhou port (the largest in southern China) fell 20.7% to 1.7 million tons between October 8 and November 6. Recent supply disruptions contributed to Chinese coal prices rising more than 10% during October.
- Inadequate railway capacity in Inner Mongolia has resulted in high transportation costs. To supply its plants in the southeast, Datang has been importing coal from Indonesia and Australia. Infrastructure problems are greater still with respect to Mongolian coal.
- Until domestic infrastructure bottlenecks in coal transportations can be removed, China will depend more heavily on thermal coal imports to meet the country’s growing electricity demand.
- Of the 75 million tons of coal that Datang requires for annual operations, the company has imported a record 3 million tons YTD.
- Datang is currently 15% self-sufficient in coal. The company aims to significantly increase its coal production capacity, reaching 30% to 40% self-sufficiency by 2015.
- Datang has invested close to RMB70bn in coal-to-gas and coal-to-polypropylene projects to date – these projects could take several years to come online. According to J.P. Morgan analyst Edmond Lee, its first 60%-owned Duolun coal conversion project is due to begin operations by end-2010, almost two years behind schedule. Such projects will boost the overall demand for coal and diversify the supply chain, while lowering the costs of coal-to-power conversion.
- Another driver of coal imports is the inferior quality of domestic thermal coal. Lower-grade “brown coal” must be processed before it can be used in power plants, adding further to costs.
- Our recent discussions with China Shenhua Energy and China Coal suggest that this year’s coal imports are on course to exceed 100mt in 2009, and might rise to 200mt/year over the next several years.
- Competition for regional coal assets is heating up – Chinese and Indian power producers are actively attempting to secure more production capacity.
Jing Ulrich | Managing Director & Chairman | China Equities & Commodities | J.P. Morgan | 25/F Chater House, HK | T: +852 2800 8635 | M: +852 9768 3480 | jing.l.ulrich@jpmorgan.com | To access Hands-on China publications on Bloomberg type JPRA <GO> or on Morganmarkets at www.morganmarkets.com/handsonchina
do your own due diligence
herb