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China Coal Has Reached Peak Production and US Coal Has Reached Bottom Price

|Includes: BP, BTU, 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.