China Still Runs on Coal (BTU, ANR, CNX, BHP, RTP, YZC)

China consumed 864 million metric tons of coal in the first quarter of 2010. Thermal coal consumption to generate electricity totaled 444 million metric tons and metallurgical coal consumption, primarily used in steel making, consumed 136 million tons. Of the total, 44.41 million metric tons were imported. The China Electricity Council expects the country to consume 1.6 billion metric tons in 2010 for electricity generation. All told, China could consume 3.3 billion metric tons of coal in 2010.

Imports of coal are expected to drop as domestic coal production picks up and price differentials widen with seaborne coal. This does not augur well for Australian producers or for US producers, such as Peabody Energy Corp.(NYSE: BTU) which have significant operations in Australia. Other US coal companies such as Alpha Natural Resources, Inc. (NYSE: ANR) and Consol Energy Inc. (NYSE: CNX) only mine coal in the US. Among the world’s largest miners, BHP Billiton Ltd. (NYSE: BHP) and Rio Tinto plc (NYSE: RTP) both have significant exposure to Chinese imports from their Australian operations.

Peabody this morning lowered its bid for Australia’s Macarthur Coal Ltd. from $3.8 billion to $3.4 billion as a result of a proposed Australian tax of 40% on mining profits. Macarthur is the world’s largest exporter of metallurgical coal, which commands a premium price and is likely to remain in high demand from Chinese steel makers.

Yanzhou Coal Mining Co. Ltd. (NYSE: YZC) is China’s only publicly listed mining company sold 10 million metric tons of coal in the first quarter of 2010, and used another 37 million tons to generate electricity. Yanzhou bought Australian miner Felix Resources last year for $3.2 billion.

Coal dominates in China, but the country is trying to do something to restrict its dependence on coal, which provides 69% of China’s energy and 83% of its CO2 emissions. China’s goal is to lower CO2 emissions relative to GDP by at least 40% by 2020.

To achieve that goal, China is making efforts on a lot of different fronts. The Chinese government is rapidly building out its alternative energy infrastructure, primarily in wind generation and nuclear power plants. China has also shut down smaller coal-fired power plants and replaced them with cleaner units.

China plans a capacity of 150,000 megawatts of wind generation by 2020, up from 100,000 megawatts today, a growth rate of 20%/year. The country’s nuclear generation fleet is also planned to grow by as many as 91 new plants in the next decade. Nuclear capacity growth is projected to be even more spectacular than wind: a near-10X increase from 9,000 megawatts now to 86,000 megawatts by 2020.

But even new, clean generation won’t seriously lower China’s dependence on coal. The steel making industry’s demand for coking coal will only grow as demand for steel grows. This is good news for the Australian seaborne coal industry, as well as for Yanzhou’s metallurgical coal production in China.

The country is also closing or consolidating its thousands of small mines, many of which are illegal to begin with. China’s coal mining industry is also the most dangerous in the world. About seven people a day are killed in Chinese coal mines, a total of 2,631 in 2009 alone.

In the photo, one of more than 40 victims of a mine explosion in northern China is carried out of the mine.  As long as China’s economy is growing at around 10% annually, coal will play a significant role in the country’s energy mix. Wind and nukes will grow as well, just like everything else in China. But coal won’t be displaced any time soon.

Paul Ausick