Coal Sector Set to Meet Consolidation Goals

Compared with other industries, such as information technology and retailing, which have experienced significant merger and acquisition (M&A) activity in recent years, China's coal sector has been relatively quiet.

However, under a national coal industry policy published last year, the industry is set to experience increased consolidation.

China will build six to eight coal enterprises each with a capacity of 100 million tons, and eight to 10 coal enterprises with a capacity of 50 million tons, according to the National Development and Reform Commission (NDRC), the nation's top economic planning body.

These groups are expected to contribute more than half of China's coal output of 2.6 billion tons in 2010.

"More M&As will occur in the coal industry, in order to boost the competence of Chinese coal producers in the world," Liang Dunshi, vice-chairman of the China Coal Transport and Distribution Association, tells China Business Weekly.

China produced 2.4 billion tons of coal in 2006 but its 80,000 coal companies produced an average of just 30,000 tons.

The country has started a nationwide campaign to close small coal mines, which account for one-third of China's total production but two-thirds of the deaths resulting from colliery accidents.

With the average output remaining low, China's coal companies need to regroup to make better use of their resources, says Pu Hongjiu, vice-chairman of the China National Coal Association.

Large companies will have more resources if they acquire small ones, says Huang Qing, secretary to the board of directors of Shenhua Group, which produced 203 million tons of coal in 2006 to become China's first coal company to pass the 200-million-ton milestone.

The country's second largest coal producer, China National Coal Group, produced 90.6 million tons of coal in 2006. At present in China there are 10 coal enterprises, which have a capacity of over 30 million tons.

Large coal enterprises are encouraged to develop other business, such as power generation and railway and port transportation, according to the industry policy.

They are also encouraged to participate in other sectors such as the metallurgical, chemical, construction material and transportation industries.

"Like the nation's largest coal enterprise, Shenhua, which has diversified its business into coal, power and transportation, more Chinese coal producers will turn their eyes to other businesses," Liang says.

Along with building large coal enterprises, China will not approve new coal mine projects with an annual capacity of less than 300,000 tons during the 11th Five-Year Plan period (2006-10), according to the industry policy published last November.

In coal-rich provinces such as Shanxi, Shaanxi and the Inner Mongolia Autonomous Region, proposed coalmine projects will need a capacity of over 1.2 million tons per year for approval.

A total of 13 coal production bases will be built before the year 2010. All of them are located in the central and the western parts of the country, the policy says.

China will further develop coal projects in central regions while accelerating the exploration and development of coal resources in western regions.

China has proven coal reserves of 1 trillion tons, the third largest in the world. During the 10th Five-Year Plan (2000-2005), the industry has seen an increase of 11 percent year on year.

As the world's largest coal producer, China's production accounts for over one third of coal mined worldwide. "Raising entry requirements for coal projects is good for sustainable development for the industry," says Liang.

Going overseas

In search of further development, some leading domestic coal enterprises have begun cooperation agreements with foreign companies. In 2004, Yongcheng Coal & Electricity Group Co Ltd, a coal producer in central China's Henan Province, signed a coal production agreement with Brazilian mining giant CVRD.

The deal allows the company to learn advanced business practices and technologies from CVRD, President Chen Xuefeng tells China Business Weekly.

Some of the Chinese companies have their sights set on overseas coal assets. In 2004 Shandong-based Yanzhou Coal bought a coalmine in Australia, which is the first overseas acquisition of Chinese coal enterprises.

Shenhua is also considering overseas investments to boost production. The company is now in talks to buy a coking coal deposit in Mongolia to increase its coal resources, Huang Qing told China Business Weekly earlier.

If approved, the deposit will yield more than 10 million tons of coking coal annually. The deal still depends on the Mongolian government's offer, Huang said, without elaborating.

Earlier media reports said Shenhua was considering a $4 billion bid for a controlling stake in an Indonesian coal producer. However, sources with Shenhua have not commented on the deal.