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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (
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  • China Coal Has Reached Peak Production and US Coal Has Reached Bottom Price 15 comments
    Oct 2, 2011 11:50 AM | about stocks: PCXCQQ, ACIZQ, BTUUQ, BP, XOM

    At the end of last year, New York Times carried a very serious topics: Has China's Peak Coal arrived? This question deserves a lot of attentions from strategic decison makers in China and in other countries, as China is by far the most important coal producing and consuming country in the world. According to BP estimate, China's proven coal reserve is at 114.5 billion metric tons, or 13.3% of the world's total of 860.9 billion tons.

    Consider that China's coal reserve figure has not been revised since 1992, some researchers believe China's actual remaining coal reserve is as low as 90 billion tons. Cumulative Chinese coal production volume is also roughly 90 billion tons. If that is true, China has produced half of its original coal reserve, so the Peak Coal production volume is about right now. China's coal production has been expanding at a rapid pace of 10% per year growth, reaching 3.55 billion tons per year in the first half of 2011. At this rate, even without further growth, the remaining reserve could only lasts another 25 years! Alarming signs like deteriorating coal quality and the difficult struggles to keep coal production up to meet demand all points to the conclusion that China has passed Peak Oil.

    Mean while high level officials in China do not seem to be alarmed at all. Based on their out dated assessments, they believe China's coal can last another hundred years. Are they being too optimistic? Are the numbers of China's potential coal reserve, coal that is supposed to exist but has not been discovered yet, way too exagerated?

    I deviced a way to give a reasonable estimate of the upper bound of China's coal reserve. The numbers I got are pretty persimistic, extending support to the view that China has already reached Peak Coal. My estimation method is inspired by an article by Professor Jeffrey Dukes, titled Burning Buried Sunshine.

    We know that coal, petroleum, and even natural gas, are fossil fuels. They were converted to fuel from the biomass of ancient times. We also know that the earth is a very unique life carrying planet, with oxygen in the atmosphere. Free oxygen can not exist for long, as in roughly a few million years the oxygen will be depleted due to formation of oxides with the crust material. Free oxygen can only exist if there are life forms to continuously absorb carbon dioxide and release oxygen into the atmosphere. Every single oxygen molecule came from biomass. Astronomers have proposed that we can detect ET lifes on other planets by detecting free oxygen.

    We can get a precise calculation of the amount of oxygen in the atmosphere. The atmosphere pressure on the surface of the earth multiplied by the earth surface area gives us the total weight of the atmosphere gases, which comes to 5x10^18 kilograms. Oxygen constitutes about 1/5 of the atmosphere, so there is about 1x10^18 kilograms of oxygen on earth. Because all oxygen molecules were derived from carbon dioxide, and there is a mass ratio of 12 parts carbon for every 32 parts of oxygen in carbon dioxide, I estimate that there is a total of 375 trillion tons of accumulated carbon  of biomass original.

    Consider that 29.2% of the earth surface is land area, and 70.8% is ocean, also consider that the ocean portion of the earth's biosphere is much more active than land portion, roughly FOUR times more biomass is generated per unit of ocean area than that of land area, I estimate that less than 10% of the 375 trillion tons of accumulated biomass carbon would be generated on land. That brings the figure of land based biomass carbon to 35 trillion tons.

    About half of the 35 trillion tons of land based biomass carbon would be at geological locations where coal formation is possible. That brings to coal forming land carbon to roughly 17.5 trillion tons. But the coal formation is a very wasteful geological process. According to the study of Professor Jeffrey Dukes, only roughly 8% of the original biomass carbon will form coal, the rest simply gets eaten away by germs or otherwise dissipate in the soils. So that means global underground coal reserve should be no more than 8% x 17.5 trillion tons, which is 1400 billion tons. If we assume coal extraction efficiency is 65%, the ultimate recoverable coal that originally exists on earth totals 910 billion tons. Since the dawn of civilization, humen probably have produced an accumulative amount of 200 billion tons of coal, leaving roughly 700 billion tons still under the ground. My estimate, based on a very rough physics model, actually come extremely close to the BP estimate of the global total of 861 billion tons of coal reserve remaining.

    Now let's look at China. China's land area is 9.6 million square kilometers. That's 6% of the world's total land area. If China has its fair share of coal formation, China would have 6% x 910 billion tons, or 54.6 billion tons of original coal reserve underground. If China slightly blessed with a little bit more advantage in coal forming geology, China probably has no more than 90 billion tons of original recoverable coal reserve. Let's squeeze the recovery rate of 65% a bit, and assume 80% of original coal could be recovered, which is pushing the limit, China would have 110 billion tons of original recoverable coal. Since China has already produced an accumulative 58 billion tons of coal by the end of 2011, China has now definitely passed the Peak Coal production point, the point when half of the original recoverable coal has been produced. There is 52 billion tons remaining, barely enough to last 15 years at current production rate!

    I think my derivation is very reasonable. It starts with an undisputable number, the amount of oxygen in the atmosphere, and with reasonable estimates at each step and I arrived at a global coal reserve estimate which is in agreement with the BP estimate. Unless geologists can prove that China is extremely blessed with very efficient coal formation geology, which is simply impossible, we have to agree that that official number of one trillion tons of potential discoverable coal reserve, is nothing but a bogus number.

    I advice the strategic decision makers in China to accept the conclusion that China's Peak Coal has arrived and that they must now immediately deal with the looming energy crisis in China.

    The Site of the Now Depleted Haizhou Openpit Coal Mine in Northern China.

    The above is the satellite photo of the Biggest Hole in Asia. It's the now depleted Hai Zhou openpit coal mine. China now digs and consumes 14.5 such big holes worth of coal. How long can China keep digging?


    The above chart shows China's annual coal production, from 1952 to 2011. It breaks the chart inthe last three years!


    The above chart shows coal production volumes of the top five producers, relative to the global total. You might wonder if China could not producer enough coal from its own coal mines, where else can China turn to get extra coal supply?

    So what's the implication to US investors, if China has reached Peak Coal?

    The implication is we should buy US coal stocks! China needs more than 3.6 billion tons of coal per year. It already consumes more electricity than the USA. It needs to start massive coal importation from around the world. Look around the only place it may get a significant amount of more coal, is the USA. We produce roughly 1 billion tons of coal a year and export next to nothing. It's got to change.

    China is experiencing severe electrical power shortage every where. Sudden and un-notified power cut becomes the daily norm of urban life in many places in China. As for rural areas you would thank the government if you get one hours of electricity a day at all. Blogosphere in China are full of complains that people were in the middle of cooking, or other things, and the electrical power was cut.

    Oddly so far China's coal import has not increased from last year's level. They are trying to quench down on inflation by tightly control the electricity price. Power generators, even with plenty of installed capacity, would rather idle their machines than to burn coal to generate electricity at a loss. They could care less to import foreign coal.

    The insanity of the Chinese authority has to END right now. They have to choose between collapsing China's electrical grid, collapsing China's economy and ultimately FINISHING the rule of the communist party, or letting loose of price control and let power generation enterprises to import any amount of coal they need and sell at market rate to meet the demand. Due to the huge base number of coal supply and demand in China, relative to the thin market of roughly 0.6 billion tons of coal traded globally per year, any significant importation by China would immediately jack up coal prices every where in the world.

    I urge people to buy coal stocks at current depressed level: PCX, ACI, ANR, JRCC, BTU, all of them. I don't understand the market insanity as the global coal price has been holding flat and is now looking to go even higher, and clearly China will need to buy a lot more. But as they say, when there is blood on the streets, it's time to buy. Each year about this time of the season, US coal stocks begin to rally big time into the fall. This year I believe it will be more so!

    Disclosure: I am heavily long on mentioned coal stocks and heavily long on precious metal players SWC, PAL, SSRI, CDE.

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Comments (15)
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  • Peter Epstein
    , contributor
    Comments (1658) | Send Message
    We are on the same page on this topic. Please see my story with the same conclusions!

    2 Oct 2011, 02:06 PM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2885) | Send Message
    Interesting article, but isn't Australia already sending a lot of coal to China, and won't the Mongolian coal also be going to China once it is fully developed?
    2 Oct 2011, 02:35 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » You'd better look at relative numbers. Latest number shows China produced 2.46 billion tons domestically from Jan - Aug., 2011, which brings annual prudction to 3.69 billion tons, another great leap (+>10%) from last year's production level. Importation from Jan. to July is only 68.55M tons, down from 2010. It's insanity that China is desperately digging more domestically while imports less.


    Australia produces about 0.5 billion tons a year and export about half of its production, namely about 0.25B tons a year.


    As for Mongolia, with luck their export may hit 50M (0.05B) in the year 2015. It's a drop in the bucke compare with what China needs.


    China has to turn to USA to buy more coal. It's a matter of time, and time is now. Even the USA is a small potato, producing just 1B tons per year, compare with the insatiable demand from China.
    2 Oct 2011, 03:15 PM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2885) | Send Message
    Well, I hope you are right, because US coal stocks are my number 1 long stock and short put holding and I would not mind seeing some improvement. With the current macroeconomic situation I would not be surprised to see coal stocks going a bit lower over the next month or so, but I strongly believe they will come back strongly over the long term.
    2 Oct 2011, 03:48 PM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2885) | Send Message
    The Wikipedia article on the coal industry in China is worth a read.

    2 Oct 2011, 02:50 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Thanks for the link. China has 6% of the world's land area, why should it has 13% of the world's proven coal reserve? The official Chinese coal reserve number has got to be way exagerated. If look at the geology of China it is NOT exactly a place very suitable for coal formation. Half of China's land is desert or high altitude plateau. And then you have mountains and all that. China would be lucky to get its fair share of 6% of the world's coal, in proportion to its portion of the world's land area.
    2 Oct 2011, 03:20 PM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2885) | Send Message
    Maybe. Coal is (or was) mined from mountainous areas in the Appalachians and in England and Wales. Coal seems to be a very common resource, but the question is whether it is recoverable. Huge reserves of coal 5 miles underground are probably not economically viable. I believe the world's deepest mine is about 2.5 miles in South Africa.
    2 Oct 2011, 03:58 PM Reply Like
  • Palloy
    , contributor
    Comments (5) | Send Message
    There is an assumption in the article that the proportions of coal at different degrees of quality follows some rule that says a lot of it will be low quality. The result of that would be production like a symmetrical Hubbert Curve, with a peak at the half-way point.


    But the assumption is entirely without geological backing. It may be that most of the coal in China is of good quality/ease of extraction, or it may not. This skews the Hubbert Curve, putting the peak at more or less than half-way. Given the lack of knowledge about the distribution of quality, his attempts to quantify Peak Coal is just plain silly.


    More relevant is China's stated recognition that they don't expect to be able to produce more coal in the near future, given that some of their mining and power stations right now are so inefficient (not to mention dangerous) that they should be phased out.


    Peak Coal is real enough, as is Peak Oil and Gas. Best estimates for global peaks (by the people who actually study these things) are 2026, 2011 and 2021 respectively, giving Peak Fossils at 2016. This is much earlier than anyone is ready for, and I believe this signals the end of industrial civilisation, as there will not be enough spare fossil fuels to drive the replacement of infrastructure to renewables or nuclear. Not to mention capital.


    On the other hand, one good thing about it is, if you feed the forecast fossil production into the IPCC climate model, it predicts that Peak Temperature will only be +1.3°C, which might kill us, but is a lot better than if we could burn fossil fuels at the rate that IEA thinks likely.
    3 Oct 2011, 01:57 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Palloy:


    This is not meant to be a rigorous scientific paper. Seeking Alpha is not a place to publish scientific paper. I just demonstrate the basic point using plain English. As you said various factors could affect the Peak Point. It could be before half-way, or after half-way, or right at half-way. Without going to details of those factors, assuming Peak Point is at Half-Way, is very reasonable.


    The investment thesis is China has got to start massively import foreign coal. Since the base number is huge, it can drive coal price to crazy level. US coal stocks, at their current depressed level, are excellent buys now.


    On the global warming, it is a scientific hoax. There might be some very fractional warming. Maybe the warming is only 0.01 degrees or 0.1 degrees. But even it is 1.3 degrees, it's far from enough to melt polar ice which is at 80 degrees below freezing point. The whole global warming fiasco is a scientific scam.


    Just remember, ancient earth has an atmosphere containing 25% or higher carbon dioxide. It was just fine. So what would 100 more ppm of carbon dioxide do to the earth? NOTHING.
    3 Oct 2011, 02:13 PM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2885) | Send Message
    "But even it is 1.3 degrees, it's far from enough to melt polar ice which is at 80 degrees below freezing point. The whole global warming fiasco is a scientific scam."


    Ice cannot go below 32 degrees, even if the surrounding air is colder, but the point that is generally argued is that the ice at the fringes of the ice cap that melts is melting earlier in the year , freezing later and going further north in the summer.


    England is currently enjoying the hottest October weather in over 100 years. Whether the warmer climate is caused by emissions is another question, and that may well be exaggerated, but it is hardly arguable that the planet is not currently experiencing hotter weather relative to the centuries in which temperatures have been recorded, and that sea levels are rising around low lying coasts.
    3 Oct 2011, 06:50 PM Reply Like
  • ParadiseRoad
    , contributor
    Comment (1) | Send Message
    "Ice cannot go below 32 degrees" can and at 9500 feet elevation...I can tell you that if ice didn't go below would have significant melt off anywhere above 32F. Ice frozen to the -25F we sometimes get up here takes many days of 60F plus temps to fully melt in the Spring.
    18 Oct 2011, 07:03 PM Reply Like
  • triller
    , contributor
    Comments (57) | Send Message
    What about LLEN and SCOK? Will they be able to contribute to China's insatiable appetite for coal? Steel? Metallurgic coal? China is in a so-call mine consolidation mode. Does the Chinese government realize the benefit of mining their own resource in order to make, save money? Billions of dollars of their own coal and they stifle their own mines and put their own economy at risk why? Will LLEN or SCOK or other consolidators have a chance to revive the coal mining industry in China? I believe the consolidation was attempted to outlaw the smaller, more dangerous mines and incorporate them into safer, larger concerns that will be easier to monitor, manage and tax....
    8 Nov 2011, 09:02 AM Reply Like
  • triller
    , contributor
    Comments (57) | Send Message
    The Triller in Manila is playing harmonica (to trill is to get a unique and interestingly intriguing sound from a harmonica by specifically vibrating the reeds in a certain manner), surfing, photographing and trying to reclaim my 401K, while learning how to be a better human being in the Philippines.
    8 Nov 2011, 09:17 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » The latest data available to me is that from January to November, 2011 China produced 3.462 billion tons of coal. I do not know the december data yet but if it were same as November's 0.321 billion ton, China had produced 3.783 billion tons of coal. Adding to that China's net import of 0.1824 billion tons of coal in 2011, China's total coal consumption for 2011 was 3.9654 billion tons, or 3.97 billion.


    China will have to start to import a significant portion of its coal need from overseas, although at current net import of 0.1824 billion China is already world's No. 1 coal importer.
    1 Mar 2012, 12:08 PM Reply Like
  • Trendyglitzcompany
    , contributor
    Comments (561) | Send Message
    I won't invest in China but ANR does look like it might have hit a bottom or be near one. It will take another three days of trades to know for sure on that one. The charts state it is at or near bottom but they can be wrong. This would only be for short term trades since we are dealing with a $40 stock here trading around six bucks but as it turns cold faster this year as in this coming weekend and with a cold winter in the forecast, that is going to help get this back to $20 pretty fast as by January imo.


    There are a couple good ones but I'm looking for those with 400% or higher upside for long term and to make a few thousand here and there on trades thus; I must stick with ANR the next few years since the crash. A company in real bad shape is not going to get a loan. Some huge names got loans today and ANR was in the mix. Good sign to me and look at that book value.
    1 Oct 2012, 09:30 PM Reply Like
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