can you see where this is going???By staff reporter Zhang Boling...

can you see where this is going???


By staff reporter Zhang Boling 07.08.2010 14:50
Steelmakers Add Coal to Global Shopping List

Domestic coking coal supplies can't meet the rising demands of Chinese steelmakers, encouraging them to shop abroad
Coking coal, a critical ingredient for iron and steel production, is no stranger to Chinese miners. Long veins of the valuable bitumen snake beneath the surface of Shanxi Province, Inner Mongolia and other parts of the country.

But the costs of extracting and transporting domestic coking coal are rising. Industrial integration threatens to close small mines that supply much of the nation's coal, while iron and steel producers are gradually moving away from mining regions to areas on the east coast or along rivers. Moreover, high-quality coking coal is getting harder to find.

These and other factors played into a recent decision by Wuhan Iron and Steel (Group) Corp. (WISCO), one of China's major steelmakers, to buy a significant stake in a Mozambique coal mine.
The agreement reflects an emerging trend as Chinese steel enterprises sign purchase agreements to lock in overseas resources.

WISCO agreed June 23 to pay Australian-based Riversdale Mining Ltd. (RML) a total US$ 800 million in three installments for a 40 percent stake in the Zambeze mine. The steelmaker is also prepared to purchase an 8 percent stake in RML for AU$ 10 a share, and win purchase rights for 10 percent of the coking coal dug from RML's Benga project.

WISCO and other China's steelmakers are raising production levels, boosting demand for coking coal and thus intensifying competition for bitumen. Power company demand for coal is complicating business as well.

A mid-level manager at Hebei Iron & Steel Group Co. Ltd. said his company signed a long-term supply agreement with a coking coal enterprise in Shanxi Province, but the supplier's end of the deal is more flexible than the steelmaker would like.

"Even though (the agreement) guarantees us raw materials, transportation costs are quite high close to 200 yuan per ton," the manager said. "Sometimes it's not even possible to ship the coal out because the supply for power companies has to be guaranteed first."

Resource Hunting

A WISCO source said the company was one of at least four Chinese steel enterprises that approached RML with business offers.

Lining up long-term, stable supplies of raw materials such as coking coal and iron ore is part of national "core strategy for the development of steel enterprises," China Iron and Steel Association (CISA) Secretary-General Dan Shanghua told Caixin.

"Although China currently has abundant coal reserves, high-quality coking coal is still relatively scarce," China Metallurgical Industrial Planning and Research Institute (MPI) President Li Xinchuang told Caixin. "This, coupled with consistently increasing demand, has made purchasing coking coal from overseas an option that Chinese steel enterprises must consider."

A CISA report said the strongly adhesive, bituminous variety of coking coal that steelmakers favor accounts for only 35 percent of China's coking coal reserves. And only about 27 percent of domestic coal can be used for coke.

"According to estimates, China will produce 700 million tons of steel and 665 million tons of pig iron by 2015," said Li. "Based on these figures, the country will be short 30 million tons of high-quality coking coal."

And shipping domestic coal to steelmakers is not expected to get easier. Xu Xiangchun, director of the Beijing-based consulting firm Mysteel.com, thinks a transportation gap will be hard to close at least in the short term, since most of China's coal reserves are in central and western regions, while steel production is increasingly on the east coast.

"Even if domestic coal enterprises go full-steam ahead with production," Xu said, "it would still be difficult to transport the coal due to issues with transport availability."

Moreover, he said, small mines in regions such as Henan and Inner Mongolia could be shuttered by industrial integration programs "thereby intensifying the scarcity of coking coal."

Worth the Shipping?

Mozambique is far from China, yet WISCO and other steelmakers consider long-distance shipping from overseas coal mines worth the price.

China Customs reported imports of 125 million tons of coal last year, a 211 percent increase over 2008. The upward trend is continuing: In the first five months of this year, China imported 18.7 million tons of coking coal, a 26 percent increase from the same period 2009.

From an investor perspective, Li said, Chinese steel enterprises are making the right move by spending substantial amounts to buy shares in overseas coal resources.

"Even though China's current demand for iron ore is even higher than the demand for coal, iron ore resources are more or less abundant in the world." he said. "On the contrary, high-quality coking coal resources are becoming increasingly scarce."

WISCO used about 20 million tons of coking coal last year to produce more than 29 million tons of steel. Currently up to "90 percent of WISCO's coking coal supply comes from domestic coal enterprises," a company source said. "The rest is imported."

RML's Zambeze mine holds about 9 billion tons of coal. The WISCO source said annual output will exceed 15 million tons. The Mozambique coal will primarily supply Chinese coastal plants such as the Guangxi Fangcheng Port and steelmaking facilities in Brazil, WISCO said.

The Hebei Steel source said his company in May bought a supply of high-quality coking coal from overseas mines.

"Because we signed the contract relatively early, the price was far lower than the current market price," he said. "More importantly, it helped us alleviate our problems with short supplies of high-quality coking coal."

Meanwhile, international prices of coking coal have risen substantially. Steelmakers in Japan and India recently accepted an Australian mine's price of US$ 225 per ton for third-quarter coking coal, up 75 percent from same period 2009.

And like Chinese steelmakers, major international steel enterprises have also started expanding investments in overseas mines to ensure access to coal for future production needs.

These trends have been coupled with a shift in contracting procedures that's similar to recent changes seen in the iron ore business.

A traditional, annual price-setting procedure for coking coal may be on the way out. Mining giant BHP Billiton, for example, recently started setting prices for coking coal on a quarterly basis.

"Previous experience tells us that any time China starts importing large quantities of a commodity, the price of that commodity will rise substantially," said Xu. "This risk also exists with coal. Investing directly in overseas mines can largely reduce this kind of risk and ensure safe business operations."