China coal industry unlikely to open up completely to foreign owners - AACI

Asia American Coal (AACI), the first foreign company to produce coal from a majority-owned underground mine in China, is not expecting the Chinese coal sector to open up completely to foreign investors, said the company's CEO.

'Foreign-controlled investment has had its day,' Michael Cosgrove told a press conference to mark the launch of the company's joint venture mine at Daning in northern Shanxi Province.

He said that there are still many opportunities in the Chinese coal industry, but foreign investors need more than just capital.

AACI owns 56 pct of the 4-mln tons per year Daning project, with its local partner, Shanghai-listed Lanhua Scitech, owning 36 pct. The controlling stake remains a rarity for foreign companies, and AACI has been granted a more regular share of 45 pct in its next joint venture project, a mine at Gaohe, also in Shanxi.

Gaohe is expected to be completed in three years, and AACI is in negotiations on a third mine.

International mining conglomerates have struggled to make their presence felt in China's upstream sector. While the central government may be reluctant to open the country to multinational miners, analysts and industry insiders have also suggested that smaller and more flexible foreign companies - including AACI -- have a greater chance of 'finding a niche' in the industry.

Cosgrove said foreign companies wanting to enter the industry need to concentrate on value-added aspects of China's technologically-backward coal sector, including gas handling, overall safety management and efficiency.

'They need to be contributing something to the industry,' he said.

Safety concerns remain an issue, and have been central to Asia American Coal's involvement in China, he said.

Coalbed methane (CBM), as well as being the cause of several catastrophic accidents in recent years, is also one of the biggest obstacles to the efficient development of China's mines. AACI was formed in 1999 partly in order to bring US-made CBM technology to China, and at Daning, the company has been 'dealing with one of the gassiest coal mines in the world,' said Cosgrove.

AACI is building a 30-megawatt power plant that will extract and utilize dangerously high levels of CBM from the mine. The company is also applying for Clean Development Mechanism accreditation for the power project, he added.

Cosgrove noted the resource recovery rate at China's mines is notoriously low. Some researchers estimate that as much as 70 pct of the coal in western mines is wasted as a result of inadequate technology and badly-planned construction.

Foreign companies can help redress the situation, he said.

At the Daning Mine, the recovery rate has been raised to 80 pct, far higher than the Chinese average, he noted, and the venture would consider opportunities to introduce the technology and expertise to other mines.

China has been reluctant to allow foreign companies to invest in its upstream energy resources, permitting them only to provide technology and other assistance to local firms.

Crucially, the government hopes to consolidate its domestic energy companies before they are confronted with the full force of international competition. It has provided substantial policy support enabling state coal giants such as Shenhua to swallow up smaller mining enterprises and extend their business towards downstream chemicals, power generation and coal-to-liquids.

Some of the more prominent deals done with foreign companies have involved technology transfers from the likes of Sasol.

It is unlikely this pattern will change, despite AACI's breakthrough in gaining majority ownership of a project, Cosgrove said.

'We will still see interest from foreign investors in the downstream sector,' he said. 'They will move to energy products like coalbed methane. The local [Shanxi] government is very keen on inviting foreign investors to this area.'

The reforms in the industry have allowed companies such as Asia American Coal to take advantage of the Chinese market, he said.

'In the last few years, we have seen the emergence of successful coal groups capable of using new technology.

'The investment environment has also changed, with new regulations covering levels of foreign ownership in the industry,' he said.

Construction of the Daning mine began in 2001. After building the mine and installing imported equipment, the company had to undergo six months of extensive tests and inspections - and acquire six separate operating licenses covering exploration, production and safety - before being allowed to formally launch.

Developing local relationships and understanding the specific geological conditions of the mine were crucial, said Cosgrove.

As China's miners continue to consolidate their position in the industry, foreign companies need to 'add something beyond what the industry can do currently,' he said.