Why does China import coal?

Coal currently accounts for 27 percent of the world’s primary energy consumption. In China, coal is the most dominant fuel as it accounts for 70 percent of the country’s primary energy consumption and 93 percent of its proven reserves of fossil fuels. China’s reported coal output of 3.24 billion tons represents nearly half of world total coal output.  Accordingly to the US Energy Information Administration, in 2010, China’s share in global coal production was 45%, followed by USA and India, with shares of 13% and 8% respectively. According to the Chinese Ministry of Land and Resources, China’s proven coal reserves of 170 billion tons correspond to 19 percent of the global total, making it the second country after United States with the largest coal reserves. China, has seen an exponential growth in demand for coal, with an increase of 230% during the period from 1990 to 2010, and now consumes over 63% of the total global production of coal. It also accounts for 45% of total world coal production. China’s energy consumption is dependent on coal as a fuel, accounting for a significant 70% for meeting its energy needs. Coal is critical to China and plays an important role in the shaping of the Chinese economy.

Historically China has been a net coal exporter because of a large reserve base, low labor costs, attractive export prices and government tax incentives. In 2003, China’s coal exports peaked at 94 Mt with coal imports at 11 Mt; since China produced 1,835 Mt of coal and consumed a similar amount in the same year, imports had very little impact on China’s overall coal balance at the time. In 2008, China’s coal imports and exports equalized. In 2009, China imported 126 Mt of coal and became a net coal importer for the first time. The reasons for importing such a quantity of coal were firstly, the prolonged dispute over contract thermal coal prices between China’s major coal enterprises and power companies, and secondly, the geographic proximity between China’s coastal provinces and major regional coal export countries. The amount of coal imported, i.e. 126 Mt, in comparison to China’s total coal consumption of 2,985 Mt in 2009, accounted for only 4.2 percent of China’s coal consumption, but it accounted for 15 percent of the global coal trade. Currently, Indonesia and Australia are the two largest overseas coal suppliers to China. During China’s eleventh five year plan period between 2006 and 2010, these two countries accounted for half of China’s total coal imports. However, there is a difference in the mixture of products coming from each of the two suppliers; Indonesian exports to China are dominated by steam coal and Australian exports to China are majorly coking coal.  Steam coal is suitable for producing steam and mainly used in power generation and 95 percent of Indonesian shipments to China in 2010 consisted of steam coal.

Majority of China’s coal resources are located in the western and northern provinces and the major consumption centers are located along China’s heavily populated eastern and southern provinces. The coal is transported domestically through these long distances mainly via railways. National coal output grew at 5.3%, the amount of coal that was transported via railways grew at 4.3%, and the amount of coal handled by the coastal ports in China grew at 19% annually. Since the coal output grew at a higher rate than the capacity to carry coal via railway, a transportation bottleneck was witnessed in China, which led China to import coal. Also the increased capacity to handle coal at its ports made it easy for China to import coal from trade partners such as Australia and Indonesia.

Another reason for China to import Coal was related to safety and environmental concerns pertaining to coal mining. China’s national average is of 0.749 deaths/Mt of coal, while the average of China’s state owned company Shenhua is 0.025 death/Mt of coal. The average of 14.81 deaths/Mt of coal in 2001 of small village mines gives the Chinese government an incentive to import coal and shut these small mines which have a terrible safety record. Also the Chinese coal consists of hazardous trace elements which lead to environmental issues while mining for coal, these concerns can be reduced if the Chinese government increases its reliance on coal imports.

The price differential in domestic and international prices may be an important factor for determining China’s decision to import coal, but it is not the only factor, factors such as domestic transportation issues and environment and safety concerns play a greater role in influencing China’s import decisions.  The IEA expects coal prices to more than triple in the next decade due to the demand for coal by China and India which will give rise to supply bottlenecks for coal. Given that China currently imports only 4.2 percent of its coal consumption, and that accounts for 15 percent of global coal trade, if the domestic transportation bottleneck in China continues, along with increased environmental and safety concerns for coal mining in China, it will lead to an increase in imports by China, which will result in an increase in global coal prices.

References:

TU, J. (2011). INDUSTRIAL ORGANIZATION OF THE CHINESE COAL INDUSTRY. Stanford: PROGRAM ON ENERGY AND SUSTAINABLE DEVELOPMENT.

Tu, K. J., & Johnson-Reiser, S. (2012). Understanding China’s Rising Coal Imports. Carnegie Endowment for International Peace.

BP. (2010). BP statistical review of world energy 2010. London: British Petroleum.

CommodityPoint. (2012). Global Coal Markets – Evolution and Uncertainty. Sugar Land: UtilitiPoint International.

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4 Comments

Filed under emerging countries, energy

4 responses to “Why does China import coal?

  1. varund55

    Good job. Just curious what the Australian Coke coal is used for. You have mentioned only the use of Steam coal exported by Indonesia. Thanks.

    • umulawan

      Thanks. Australian coking coal is mainly used in manufacturing, whereas steam coal is used in power plants for the generation of electricity.

  2. China’s increasing dependence on global coal markets seems like a pretty good deal for the United States. It seems like for the first time in a long time, the US has something that China really needs. With our increasing use of natural gas as an energy source, maybe we can begin to increase our coal exports. People are predicting a possible increase in the price of coal as China continues to use as much as they can get their hands on; this could be really beneficial to the US. Also, it’ll be interesting to see whether China focuses on overcoming transportation issues and environmental concerns with domestic coal or whether they’ll just continue to import more and more coal from external suppliers.

  3. since the chinese government has now officially proclaimed tightening on ecological regulations, coal might not be the best solution for the future, http://www.deutsche-handelsagentur.com

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