The Chinese government is planning to categorise coking coal as a strategic resource that will be "protected" via incentives to optimize production and industry consolidation, Deutsche Bank said in a report Wednesday.
Citing a report by Shanghai Security News, the bank said the National Energy Administration of China was in the process of formulating these protective measures.
The steelmaking ingredient is in short supply globally, a fact which was highlighted this winter when floods in Australia's Bowen Basin led to a dramatic spike in seaborne coking coal prices. At its peak, Platts Premium Low Vol, which tracks the price of premium hard coking coal, hit $378/mt FOB Australia on January 20, up $145/mt from a month ago.
Deutsche Bank estimated, based on available data, that while China's reserves of coking coal may equate to about 50 years of consumption, the figure could be much lower given the amount of coal that is wasted during the production process.
Citing government sources, the bank said that around 20 million mt or more of coking coal resources were "damaged" every year.
"Actual recovery rates are poor and a significant amount of high-quality coking coal is wasted during the extraction process," the report said, adding that some small mines in Shanxi province had recovery rates of just 15%, meaning 6 mt of coal lost for every 1 mt produced.
The reasons cited included outdated mining techniques, a lack of regulation and considerable general inefficiencies in mine exploitation of coal in China.
The bank estimated that coking coal accounts for almost 22% of the country's total coal reserves, and that 36% of the coking coal is hard coking coal. The Shanxi and Shaanxi provinces hold 63% of China's coking coal reserves, it said.
The bank said that policy pressure to rationalize and consolidate the coking coal industry could limit supply growth in the next couple of years, leading to higher demand for imports.
China's coking coal imports grew from just 7 million mt in 2008, to 34 million mt in 2009 and 47 million mt in 2010.
The bank, citing a China Securities Journal report, said that domestic Chinese production of coking coal in 2010 was 513 million mt.
RAIL LINE TO EASE TRANSPORT 'BOTTLENECK' BY 2014/2015
Chinese coking coal traders and end-users have consistently cited transportation as one of the main challenges for the industry, especially during winter when weather conditions worsen.
But the bank said the "transportation bottleneck" in China could begin to ease by 2014/2105.
It said a 1,200 km railway network between central and southern Shanxi and the ports in Shandong province is reportedly due to be completed in 2014. "We believe the 200 million mt/year capacity rail line is likely to ease some of the tightness in the market at that time," the bank said.
In the short-term, the bank said it expects Chinese demand for coking coal to remain strong in April and May before decelerating during the summer months. Demand would then rebound near the of the year in a seasonal pattern.
The bank also said that Chinese coking coal imports could flatten out after 2012, but added that Brazil and India would remain important growth markets for consumption.
Further out, the bank said it sees Chinese steel production peaking at 750 million mt/year around 2015/2016.
